The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: Registration

  • From Vol. 11 No.7 (Feb. 15, 2018)

    SEC Halts Registration of Cryptocurrency Mutual Funds, Calling for Dialogue Regarding Valuation, Liquidity, Custody, Arbitrage and Manipulation Risk

    Dalia Blass, Director of the SEC Division of Investment Management, has issued a staff letter to the Securities Industry and Financial Markets Association and the Investment Company Institute outlining her Division’s concerns about funds that invest in cryptocurrencies. The letter focuses on registered funds that desire to invest in cryptocurrencies and indicates that, for the time being, the SEC will not register funds that “intend to invest substantially in cryptocurrency and related products.” It also sheds light on the SEC’s general view of this evolving asset class, which may inform its perspective on private fund investments involving cryptocurrencies. This article summarizes the letter and its key takeaways for managers considering launching cryptocurrency funds, as well as any industry participant contemplating investing in cryptocurrencies. For more on investment in cryptocurrencies, see “Opportunities and Challenges Posed by Three Asset Classes on the Frontier of Alternative Investing: Blockchain, Cannabis and Litigation Finance” (Dec. 14, 2017). See also our three-part series on blockchain and the private funds industry: “Basics of the Technology and How the Financial Sector Is Currently Employing It” (Jun. 1, 2017); “Potential Uses by Private Funds and Service Providers” (Jun. 8, 2017); and “Potential Impediments to Its Eventual Adoption” (Jun. 15, 2017).

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  • From Vol. 10 No.41 (Oct. 19, 2017)

    Steps an Exempt Reporting Adviser Must Take to Transition to SEC Registered Investment Adviser Status: Regulatory Filings, Updates to Fund Documents and Preparation for SEC Examination (Part Three of Three)

    Section 208(a) of the Investment Advisers Act of 1940, as well as prior statements made by the SEC, make it clear that an investment adviser is prohibited from using its registration status to suggest that the Commission has approved, recommended or sponsored the adviser. The fact remains, however, that being an SEC registered investment adviser (RIA) carries weight in the industry if for no other reason than registration with the Commission is a threshold issue for some investors. This final article in our three-part series outlining the steps that exempt reporting advisers (ERAs) must take to transition to RIA status reviews the key regulatory filings that RIAs must file examines amendments that ERAs may need to make to their fund documents in anticipation of their change in registration status and provides insight into what newly registered advisers should expect from the SEC examination process. The first article discussed the circumstances under which an ERA would be required to register as an RIA, along with considerations for ERAs augmenting their compliance programs. The second article outlined key policies and procedures that ERAs should consider when drafting their compliance manuals. For more on the examination of RIAs, see “OCIE 2017 Examination Priorities Illustrate Continued Focus on Conflicts of Interest; Branch Offices; Advisers Employing Bad Actors; Oversight of FINRA; Use of Data Analytics; and Cybersecurity” (Jan. 26, 2017).

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  • From Vol. 10 No.40 (Oct. 12, 2017)

    Steps an Exempt Reporting Adviser Must Take to Transition to SEC Registered Investment Adviser Status: Adopting Compliance Policies and Procedures (Part Two of Three)

    Designing compliance policies and procedures that are appropriately tailored to a private fund adviser’s risks is a critical component of a compliance program for an SEC registered investment adviser (RIA). Exempt reporting advisers (ERAs) transitioning to RIA status that have not already devoted the time and resources to developing these policies and procedures will likely find this to be the most time-consuming aspect of the registration process. To assist ERAs with the creation and implementation of appropriate compliance policies and procedures, this second article in our three-part series outlines key policies and procedures that ERAs should consider when drafting their compliance manuals. The first article discussed the circumstances under which an ERA would be required to switch to SEC registration, along with considerations for ERAs building out their compliance programs. The third article will review the regulatory filings required to be filed by RIAs, amendments that ERAs may need to make to their fund offering documents in anticipation of their change in registration status, as well as guidance as to what newly registered advisers should expect from the SEC examination process. See “Hedge Fund Manager Deerfield Fined $4.7 Million for Failing to Adopt Insider Trading Compliance Policies Tailored to the Firm’s Specific Risks” (Sep. 21, 2017).

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  • From Vol. 10 No.39 (Oct. 5, 2017)

    Steps an Exempt Reporting Adviser Must Take to Transition to SEC Registered Investment Adviser Status: Registration Triggers and Building a Compliance Department (Part One of Three)

    Unlike advisers exempt from SEC registration prior to the enactment of the Dodd-Frank Act, advisers claiming exemption from registration as “exempt reporting advisers” (ERAs) under one of the act’s narrow exemptions do not operate entirely outside of the SEC’s radar. Although ERAs are not registered with the SEC, they are nonetheless required to file and disclose certain information on Form ADV Part 1. This three-part series is designed to assist ERAs transitioning from the status of ERA to that of an SEC registered investment adviser (RIA). This first article discusses the circumstances under which an ERA would be required to switch to SEC registration, along with considerations for an adviser when building out its compliance program. The second article will outline key policies and procedures that an ERA should consider when drafting its compliance manual. The third article will review the regulatory filings required to be filed by RIAs, amendments that ERAs may need to make to their fund offering documents in anticipation of a change in registration status, as well as guidance as to what newly registered advisers should expect from the SEC examination process. For additional background on ERAs, see “ACA Webcasts Detail Exempt Reporting Adviser Qualifications and Compliance Obligations” (Mar. 8, 2012); and “Impact of the Foreign Private Adviser Exemption and the Private Fund Adviser Exemption on the U.S. Activities of Non-U.S. Hedge Fund Managers” (May 13, 2011).

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  • From Vol. 10 No.20 (May 18, 2017)

    Fund Managers Looking to Canadian Market Must Be Aware of Nuances of Canada’s Regulatory Regime

    Having emerged from the global financial crisis relatively unscathed, Canada enjoys a reputation for having a stable and prosperous economy and a base of sophisticated investors interested in opportunities presented by U.S. fund managers. Although there are many political, economic and cultural similarities between the U.S. and Canada, stateside fund managers seeking to market in Canada must pay close attention to the differences between the countries’ regulatory regimes. Specifically, missteps in navigating certain Canadian registration requirements can lead to hefty fees and fines that are easily avoidable. Additionally, fund managers may have to contend with unique cultural and language issues presented by certain provinces, such as Québec. To help readers understand the myriad regulatory and cultural particularities that come into play when marketing funds in Canada, The Hedge Fund Law Report interviewed three partners at Canadian law firm McMillan: Leila Rafi, Michael Burns and Margaret C. McNee. For more on issues faced by U.S. fund managers marketing to Canadian investors, see our two-part series “How U.S. Managers Can Raise Capital in Canada While Complying With Local Laws”: Part One (Apr. 27, 2017); and Part Two (May 4, 2017). 

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  • From Vol. 10 No.18 (May 4, 2017)

    How U.S. Managers Can Raise Capital in Canada While Complying With Local Laws (Part Two of Two)

    The decision by a U.S. adviser to market to Canada-based investors is often driven by the desire to obtain sizeable allocations from large institutional investors, including government pension plans. This choice, however, should not be made in a vacuum, as steps need to be taken by a firm’s legal, compliance and finance professionals to ensure that advisers comply with Canadian laws when marketing funds and selling their interests. In this two-part series, The Hedge Fund Law Report has identified certain pre-sale considerations (e.g., registration issues and additional disclosures to be provided to prospective purchasers) and post-sale obligations (e.g., regulatory filings and associated fees) for advisers marketing in Canada. This second installment explores when Canadian investment adviser registration requirements are triggered and what they entail; how Canada’s prospectus requirement applies in a private placement; when a U.S. manager must attach a Canadian “wrapper” to its fund’s private placement memorandum; payment of the Ontario capital markets participation fee; and other ongoing reporting requirements. The first article discussed two registration requirements that all advisers to private funds should consider prior to marketing their funds to Canadian investors. For additional insights on doing business in Canada’s funds market, see “Practitioners Discuss U.S. and Canadian Shareholder Activism and Activist Tools” (Dec. 4, 2014).

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  • From Vol. 10 No.17 (Apr. 27, 2017)

    How U.S. Managers Can Raise Capital in Canada While Complying With Local Laws (Part One of Two)

    Over the past decade, several factors have caused U.S. private fund advisers to become considerably more aware that many countries have laws restricting a foreign adviser’s ability to market to investors in those jurisdictions. See “K&L Gates Partners Offer Practical Guidance for Hedge Fund Managers on Raising Capital in Australia, the Middle East and Asia” (Oct. 30, 2014). Canada is one such country that has long since maintained a comprehensive regulatory framework applicable to both Canadian-based and foreign asset managers seeking to raise capital from local investors. While non-resident advisers generally view compliance with Canada’s rules as manageable, they must still contend with a number of regulatory hurdles. In this two-part series, The Hedge Fund Law Report has identified the key registration issues, as well as ongoing regulatory and filing obligations, that may apply to non-Canadian managers seeking to raise capital in Canada. This first installment discusses two registration requirements that all private fund advisers should consider prior to marketing their funds to Canadian investors. The second article will explore a third registration requirement triggered in the managed account context, as well as a variety of additional rules U.S. managers may need to comply with when marketing their funds. For additional insight about Canada’s regulation of the fund industry, see “AIMA Canada Handbook Provides Roadmap for Hedge Fund Managers Doing Business in Canada” (Sep. 13, 2012).

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  • From Vol. 10 No.16 (Apr. 20, 2017)

    SEC Urges Advisers Relying Upon Unibanco No-Action Letters to Submit Certain Documentation 

    As investment advisers eagerly await clarity about the direction the SEC will take in the Trump era and whether it will deviate from past enforcement practices, SEC guidance and information updates on major policy issues face intense scrutiny. One of the most significant publications to come out of the agency since the new administration took office provides specific guidance to multi-national financial institutions relying on the “Unibanco letters,” which concern the extra-territorial application of the Investment Advisers Act of 1940. This update contains valuable information from compliance and procedural standpoints, as the SEC appears to be reminding advisers that rely upon the Unibanco letters about the complex requirements set forth therein. To help readers understand the significance of the information update and its effect on their businesses, this article analyzes the update and provides commentary from legal practitioners with experience representing multi-national advisory firms. For more on the Unibanco letters, see “SEC Delays Registration Deadline for Hedge Fund Advisers, and Clarifies the Scope and Limits of Registration Exemptions for Private Fund Advisers, Foreign Private Advisers and Family Offices” (Jun. 23, 2011).

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  • From Vol. 10 No.15 (Apr. 13, 2017)

    New Rule Offers Managers a Way to Raise Capital in China

    Until recently, the only way for a U.S. fund manager to offer fund management services in China was through a non-controlling interest in a joint venture with a local manager. Earlier this year, the Asset Management Association of China issued a new rule permitting “wholly foreign-owned enterprises” (WFOEs) to offer private funds to qualified Chinese individual and institutional investors. For more on raising capital in China, see “How Private Fund Managers Can Access Investor Capital in Hong Kong and China: An Interview With Mayer Brown’s Robert Woll” (Feb. 23, 2017). In a recent program moderated by Sanjay Lamba, assistant general counsel of the Investment Adviser Association, K&L Gates partners Henry Wang and Joshua J. Yang offered a detailed roadmap to the formation and authorization of a private fund WFOE. This article summarizes the speakers’ insights. For a comprehensive look at opening a hedge fund management company in Hong Kong, see our four-part series “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia”: Part One (Dec. 1, 2011); Part Two (Dec. 8, 2011); Part Three (Dec. 15, 2011); and Part Four (Jan. 19, 2012).

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  • From Vol. 10 No.8 (Feb. 23, 2017)

    How Private Fund Managers Can Access Investor Capital in Hong Kong and China: An Interview With Mayer Brown’s Robert Woll

    As the personal wealth of many mainland Chinese citizens has continued to grow, U.S. and European asset managers are eager to enter that market. Accessing Chinese capital, however, is fraught with barriers to entry, including severe restrictions by the Chinese government on capital outflows by investors. Managers may be able to reach some of these investors through Hong Kong, but that capital raising and asset management activity may trigger a licensing requirement with the Hong Kong Securities and Futures Commission, which is seen as much more hands-on than the SEC and the U.K. Financial Conduct Authority. See “K&L Gates Partners Offer Practical Guidance for Hedge Fund Managers on Raising Capital in Australia, the Middle East and Asia” (Oct. 30, 2014). In a recent interview with The Hedge Fund Law Report, Robert Woll, a partner in Mayer Brown’s Hong Kong office, provided an update on the state of the alternative asset management industry in both China and Hong Kong, particularly as it relates to managers establishing a presence in these jurisdictions and marketing to investors. For insight from other Mayer Brown attorneys, see our three-part series on how funds can use subscription credit facilities: “Provide Funds With Needed Liquidity but Require Advance Planning by Managers” (Jun. 2, 2016); “Offer Hedge Funds and Managers Greater Flexibility” (Jun. 9, 2016); and “Operational Challenges for Private Fund Managers” (Jun. 16, 2016).

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  • From Vol. 9 No.43 (Nov. 3, 2016)

    The SEC’s Recent Revisions to Form ADV and the Recordkeeping Rule: What Investment Advisers Need to Know About Managed Account Disclosure, Umbrella Registration and Outsourced CCOs (Part One of Two)

    On August 25, 2016, the SEC adopted amendments to Form ADV, Part 1A, and to Rule 204-2 under the Investment Advisers Act of 1940 (Advisers Act), the so-called “recordkeeping rule.” The amendments were previously proposed on May 20, 2015. See “A Roadmap to the SEC’s Proposed Changes to Form ADV” (Jun. 4, 2015). The amendments to Form ADV provide several points of clarification and elicit new or additional information from investment advisers, while the amendments to Rule 204-2 impose additional recordkeeping requirements on investment advisers with respect to communications that contain performance claims. These changes are designed to better protect clients and investors from fraudulent or otherwise misleading performance information. In a two-part guest series, Michael F. Mavrides and Anthony M. Drenzek, partner and special regulatory counsel, respectively, from Proskauer Rose discuss the practical implications of the amendments and highlight important steps legal and compliance personnel can take to ensure they are prepared in advance of the compliance date. This first article discusses the detailed disclosures that advisers will be required to provide with respect to managed account clients and the firm’s chief compliance officer, as well as factors a registrant should consider with respect to pursuing an umbrella registration. The second article will address the new disclosure requirements relating to an adviser’s use of social media; office locations; the amount of an adviser’s proprietary assets and assets under management; the sale of interests in 3(c)(1) funds to qualified clients; and the recordkeeping requirements regarding performance claims in communications that are distributed to any person. For additional insight from Mavrides, see “Key Legal and Operational Considerations in Connection With Preparing, Filing and Updating Form PF (Part Two of Three)” (Nov. 10, 2011); as well as our two part-series on remote examinations: Part One (May 12, 2016); and Part Two (May 19, 2016). For more on Form ADV, see “When and How Can Hedge Fund Managers Permissibly Disguise the Identities of Their Hedge Funds in Form ADV and Form PF?” (Dec. 1, 2012); and “ALJ Decision Against Investment Adviser Who Received Undisclosed Compensation From a Hedge Fund Manager It Recommended to Clients Highlights SEC Scrutiny of Forms ADV” (May 3, 2012).

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  • From Vol. 9 No.41 (Oct. 20, 2016)

    What the SEC’s Enforcement Statistics Reveal About the Regulator’s Focus on Hedge Funds and Investment Advisers

    The SEC recently announced that it brought a record 868 enforcement actions in fiscal year 2016, which closed on September 30. As in prior years, these cases were brought against a broad spectrum of players in the financial industry – including investment advisers, investment companies, industry gatekeepers and broker-dealers – covering a wide range of securities law violations, including insider trading, market manipulation, delinquent filings and Foreign Corrupt Practices Act violations. SEC Chair Mary Jo White stated in the press release that the agency’s enforcement program is a “resounding success.” She credited the increase in actions to the use of new data analytics to uncover fraud, which has enhanced the SEC’s ability to litigate such cases and its capability to bring novel and significant actions to protect investors and the markets. For more on the SEC’s use of technology in the examination process, see “SEC’s Rozenblit and Law Firm Partners Explain the SEC’s Enforcement Priorities and Offer Tips on How Hedge Fund and Private Equity Managers Can Avoid Enforcement Actions (Part Three of Four)” (Jan. 15, 2015); and “OCIE Director Andrew Bowden Identifies the Top Three Deficiencies Found in Hedge Fund Manager Presence Exams and Outlines OCIE’s Examination Priorities” (Oct. 10, 2014). This article summarizes key data from the report relevant to hedge fund and private equity managers and includes reactions from industry experts regarding the SEC’s enforcement priorities. 

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  • From Vol. 9 No.34 (Sep. 1, 2016)

    CFTC Proposes Rule to Clarify Registration Obligations of Foreign CPOs and CTAs

    The Commodity Futures Trading Commission (CFTC) recently proposed to amend its rules to resolve ambiguity regarding whether certain commodity pool operators (CPOs) and commodity trading advisors (CTAs) located outside the United States are required to register. In a guest article, Nathan A. Howell and Joseph E. Schwartz, partner and associate, respectively, at Sidley Austin, review the recent rule proposal by the CFTC, along with the legislative history preceding it, and examine how the proposal would clarify the regulation requirements of foreign CPOs and CTAs. For additional insight from Sidley Austin partners, see “E.U. Market Abuse Scenarios Hedge Fund Managers Must Consider” (Dec. 17, 2015); “Recommended Actions for Hedge Fund Managers in Light of SEC Enforcement Trends” (Oct. 22, 2015); and coverage of Sidley Austin’s private funds event in New York City: Part One (Sep. 25, 2014); and Part Two (Oct. 2, 2014). For discussion of other CFTC regulatory matters, see “Hedge Fund Managers Face Imminent NFA Cybersecurity Deadline” (Feb. 25, 2016); and “CFTC Allows Hedge Fund Managers to Advertise” (Sep. 18, 2014).

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  • From Vol. 9 No.33 (Aug. 25, 2016)

    Perspectives From In-House and Private Practice: Cadwalader Special Counsel Garret Filler Discusses Family Offices, Broker-Dealer Registration Issues and Impact of Capital, Liquidity and Margin Requirements (Part Two of Two)

    The Hedge Fund Law Report recently interviewed Garret Filler in connection with his recent return to Cadwalader, Wickersham & Taft. As special counsel in the firm’s New York office, Filler represents both start-up and established hedge funds and private equity funds, as well as family offices, banks and broker-dealers. This article, the second in a two-part series, sets forth Filler’s thoughts on family offices transitioning to asset managers; broker-dealer registration issues for fund managers; considerations when negotiating counterparty agreements; the implications to hedge funds of increased capital and liquidity requirements for banks and broker-dealers; and the impact of new margin requirements for uncleared derivatives. In the first installment, Filler discussed the cultures of private fund managers; selection of outside counsel, including law firm relationships with regulators and their willingness to enter into alternative fee arrangements; and counterparty risk. For additional insight from Cadwalader partners, see “Practical Guidance for Hedge Fund Managers on Preparing for and Handling NFA Audits” (Oct. 17, 2014).

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  • From Vol. 9 No.29 (Jul. 21, 2016)

    Despite Fiduciary Duty Questions, Cayman LLCs Can Offer Savings and Other Advantages to Hedge Fund Managers

    On July 13, 2016, the highly anticipated Cayman Islands Limited Liability Companies Law, 2016, came into effect, making the limited liability company (LLC) fully available in that jurisdiction. Widely attributed to the demands of U.S. investors seeking an offshore equivalent to the Delaware LLC, the Cayman LLC has been met with positive reactions from onshore and offshore lawyers, though some have raised concerns about the vehicle’s governance. See “New Cayman Islands LLC Structure Offers Flexibility to Hedge Fund Managers” (Mar. 10, 2016). In an effort to help our readers understand structural, regulatory and registration issues of the Cayman LLC, The Hedge Fund Law Report has interviewed partners of law firms at the forefront of interactions with both the onshore financial sector and the Cayman Islands authorities regarding the law’s development. We present our findings in this article. For analysis of other recent developments in Cayman law, see “Cayman Islands Decision Highlights Three Questions That May Affect the Enforceability of Fund Side Letters” (May 28, 2015); and “Cayman Islands Monetary Authority Introduces Proposals to Apply Revised Governance Standards to CIMA-Regulated Hedge Funds and Require Registration and Licensing of Fund Directors” (Jan. 24, 2013).

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  • From Vol. 9 No.24 (Jun. 16, 2016)

    SEC Settlement Order Reignites Concerns Over Whether Private Fund Managers Must Register As Brokers

    One hallmark of being a “broker” is the receipt of transaction-based compensation. In 2013, the SEC’s David W. Blass suggested that a private equity fund manager that receives transaction-based fees in connection with a fund’s acquisition of portfolio companies should register as a broker under the Securities Exchange Act of 1934. Since then, there has not been conclusive guidance from the SEC on the topic. A recent settlement with a private equity fund manager that allegedly received transaction-based compensation and engaged in traditional brokerage activities has brought the issue back into the spotlight. This article summarizes the facts that led up to the SEC’s action, alleged violations and terms of the settlement. For more on the relationship between transaction-based compensation and broker registration, see “SEC No Action Letter Suggests That There May Be Circumstances in Which Recipients of Transaction-Based Compensation Do Not Have to Register As Brokers” (Feb. 21, 2014); and “Do In-House Marketing Activities and Investment Banking Services Performed by Private Fund Managers Require Broker Registration?” (Apr. 18, 2013).

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  • From Vol. 9 No.19 (May 12, 2016)

    U.S., U.K. and Offshore Regulators Discuss Best Ways for Hedge Fund Managers to Approach Regulation (Part One of Two)

    Hedge fund managers are subject to scrutiny by regulators in numerous jurisdictions – where the manager is based, where the fund is based and where the fund is marketed. In an increasingly global economy, cross-border regulators are cooperating more frequently, sharing information and coordinating efforts to govern the growing hedge fund industry. This month, the Hedge Fund Association presented a Global Regulatory Briefing that featured Emma Bailey, Director of the Investment Supervision and Policy Division of the Guernsey Financial Services Commission; Jennifer A. Duggins, Co-Head of the Private Funds Unit in the SEC Office of Compliance Inspections and Examinations; Garth Ebanks, Deputy Head of the Investments and Securities Division of the Cayman Islands Monetary Authority; Ifor Hughes, Assistant Director of Policy in the Policy, Legal and Enforcement department of the Bermuda Monetary Authority; and Robert Taylor, Head of the Investment Management Department at the U.K. Financial Conduct Authority. This first article in a two-part series summarizes the speakers’ commentary on fund regulation in their respective jurisdictions, cooperation among regulators and whether hedge fund regulation is sufficient to address fraud. The second article will highlight the panelists’ insights with respect to cybersecurity, anti-money laundering, the Alternative Investment Fund Managers Directive, advertising and liquidity. For more on cooperation among regulators, see “SEC Chair Emphasizes Enforcement Focus on Strong Remedies and Individual Liability” (Nov. 12, 2015); and “E.U. Action Plan to Unify Capital Markets May Affect Hedge Fund Managers” (Oct. 8, 2015).

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  • From Vol. 9 No.4 (Jan. 28, 2016)

    Going Private: Operational Considerations When Closing a Hedge Fund to Outside Investors (Part Two of Three)

    Hedge fund managers weigh the decision to return outside capital and transition to a family office or other private investment structure in order to free themselves from investor burdens, gain performance advantages or reduce regulatory obligations. However, taking a hedge fund private may not be the panacea that it first appears, as ongoing regulatory obligations persist despite the lack of outside investors in the converted vehicle. See “Benefits and Burdens for Hedge Fund Managers in Establishing or Converting to a Family Office” (Jun. 6, 2014); and “Staff of SEC Division of Investment Management Clarifies the Scope of the Family Office Rule” (Feb. 9, 2012). This article, the second in a three-part series, examines the operational considerations a hedge fund manager faces when converting its hedge fund, including ongoing regulatory obligations and staffing concerns. The first article explored the “going private” trend and the factors a hedge fund manager should consider when deciding whether to convert a hedge fund, as well as the options available once that decision has been made. The third article will detail the mechanics for taking a hedge fund private, including redemption of outside investors and costs of conversion.

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  • From Vol. 9 No.3 (Jan. 21, 2016)

    Going Private: Factors to Consider When Closing a Hedge Fund to Outside Investors (Part One of Three)

    In late 2015, BlueCrest Capital Management announced that it would be returning outside capital and transitioning to a private investment partnership, managing only assets of its partners and employees. In doing so, BlueCrest has joined the growing ranks of hedge fund managers who, for a number of reasons, have decided to close their funds to outside investment and convert into a private structure. Historically, hedge fund managers weary of investor demands; increased regulatory and compliance requirements; and potential publicity issues have typically converted to family office structures. See “Legal Mechanics of Converting a Hedge Fund Manager to a Family Office” (Dec. 1, 2011). However, there are options beyond a family office for taking a hedge fund private. This article, the first in a three-part series, explores the “going private” trend and the factors a hedge fund manager should consider when deciding to convert a hedge fund, as well as the options available once that decision has been made. The second article will examine the operational considerations a hedge fund manager faces when converting its hedge fund, including ongoing regulatory obligations and staffing concerns. The third article will detail the mechanics for taking a hedge fund private, including redemption of outside investors and costs of conversion.

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  • From Vol. 8 No.47 (Dec. 3, 2015)

    Advise Technologies Program Provides Guidance for Non-E.U. Hedge Fund Managers Registering Under E.U. Private Placement Regimes (Part One of Two)

    Many non-E.U. fund managers have hesitated to market their funds into the E.U. since the Alternative Investment Fund Managers Directive (AIFMD) took effect, because of national private placement regime (NPPR) requirements of each country in which the manager wants to market.  Non-E.U. managers have been concerned about potentially burdensome and disparate registration and reporting requirements.  A recent program presented by Advise Technologies sought to dispel some of those concerns and offered insights into how the NPPRs function in practice.  The program, “Non-E.U. Fund Managers: Why AIFMD Is Easier Than You Think,” was moderated by William V. de Cordova, Editor-in-Chief of The Hedge Fund Law Report, and featured Bill Prew, Founder and CEO of INDOS Financial; Tim Slotover, Founder and Director of flexGC; Jeanette Turner, Managing Director and General Counsel of Advise Technologies; and Arne Zeidler, Founder and Managing Director of Zeidler Legal Services.  This article, the first in a two-part series, summarizes the key takeaways from the program with respect to initial entry requirements, pre-investment disclosures and annual reporting requirements under the NPPRs.  The second article will address regulatory reporting requirements and the evolution of marketing under the NPPRs.  For more from Slotover, Turner and Zeidler on the AIFMD, see “AIFMD Is Easier for Non-E.U. Hedge Fund Managers Than Commonly Anticipated,” The Hedge Fund Law Report, Vol. 8, No. 41 (Oct. 22, 2015).  For more on marketing funds into the E.U., see “Passports, Platforms and Private Placement: Options for Marketing Funds in Europe in the Post-AIFMD Era,” The Hedge Fund Law Report, Vol. 8, No. 17 (Apr. 30, 2015); “Navigating the Patchwork of National Private Placement Regimes: A Roadmap for Marketing in Europe by Non-E.U. Hedge Fund Managers That Are Not Authorized Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 28 (Jul. 24, 2014); and “Four Strategies for Hedge Fund Managers for Accessing E.U. Capital Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 6 (Feb. 13, 2014).

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  • From Vol. 8 No.41 (Oct. 22, 2015)

    AIFMD Is Easier for Non-E.U. Hedge Fund Managers Than Commonly Anticipated

    With the introduction of Europe’s Alternative Investment Fund Managers Directive (AIFMD), non-E.U. alternative investment fund managers (AIFMs) have sought information about what the directive means for them and whether they should avoid Europe altogether.  Generally speaking, the sentiment has been negative, with firms warned about the need to register in – and comply with distinct reporting requirements in – each jurisdiction, as well as the need to disclose sensitive compensation information.  In the end, most U.S. firms have opted to rely on reverse solicitation or simply stay out of Europe for the time being.  In the two years since AIFMD went into effect, much has been learned about how Member State regulators intend to treat non-E.U. AIFMs.  In many ways, AIFMD is easier than expected for non-E.U. AIFMs.  In short, a non-E.U. firm wishing to market in Europe should not let fear of AIFMD get in its way.  In a guest article, Jeanette Turner, managing director and general counsel at Advise Technologies, Tim Slotover, founder of flexGC, and Arne Zeidler, founder and managing director of Zeidler Legal Services, examine the obligations of non-E.U. AIFMs under the National Private Placement Regimes (NPPRs) of individual European countries and explore alternatives to the NPPRs for non-E.U. AIFMs to market their funds in Europe.  On Tuesday, October 27, 2015, from 8:00 a.m. to 10:00 a.m. EDT, Turner, Slotover and Zeidler will expand on the thoughts in this article – as well as other areas of AIFMD that affect non-E.U. hedge fund managers – in a seminar entitled “Non-E.U. Fund Managers: Why AIFMD Is Easier Than You Think.”  For more information and to register for the panel discussion, click here.  For additional insight from Turner, see “MiFID II Expands MiFID I and Imposes Reporting Requirements on Asset Managers, Including Non-E.U. Asset Managers,” The Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015); and “Seven Tips and Lessons Learned from January 2015 AIFMD Filers,” The Hedge Fund Law Report, Vol. 8, No. 6 (Feb. 12, 2015).

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  • From Vol. 8 No.38 (Oct. 1, 2015)

    Prohibited Transaction, Reporting and Side Letter Considerations Under ERISA for European Hedge Fund Managers (Part Two of Three)

    A growing number of European hedge fund managers are actively seeking injections of capital from U.S. investors subject to the Employee Retirement Income Security Act of 1974 (ERISA).  Hedge fund managers wishing to “cross-over” their funds into the ERISA regulatory sphere must, however, be cognizant of the increased and complex tangle of regulations and compliance obligations which have often deterred European managers from pursuing ERISA assets.  This second article in a three-part series examines particular issues U.K. and other European managers face stemming from prohibited transactions rules and reporting requirements under the ERISA regime and offers approaches to side letters for European managers raising capital from ERISA plans.  The first article analyzed the pertinent issues affecting European managers relating to liability standards and incentive fees.  The final article in the series will address concerns relating to indicia of ownership requirements, bond documentation and other issues.  See also “Happily Ever After? – Investment Funds that Live with ERISA, For Better and For Worse (Part Five of Five),” The Hedge Fund Law Report, Vol. 7, No. 37 (Oct. 2, 2014); and “RCA PracticeEdge Session Highlights the Key Points of Intersection between ERISA and Hedge Fund Investments and Operations,” The Hedge Fund Law Report, Vol. 7, No. 27 (Jul. 18, 2014).

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  • From Vol. 8 No.36 (Sep. 17, 2015)

    CFTC Requires Most Registered Commodity Pool Operators, Commodity Trading Advisors and Introducing Brokers to Join the NFA

    The Dodd-Frank Act requires hedge fund managers that engage in certain swap-related activities to register with the CFTC as either commodity pool operators (CPOs), commodity trading advisors (CTAs) or introducing brokers (IBs).  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  Until now, such CFTC registrants have generally only been required to join the National Futures Association (NFA) if they were also engaged in commodities futures transactions.  To ensure that registrants engaging only in swap-related activities join the NFA – and thereby become “subject to the same level of comprehensive NFA oversight” – the CFTC recently adopted Final Rule 170.17 (Rule), which requires all registered CPOs and IBs, as well as many registered CTAs, to join the NFA.  This article summarizes the Rule, the relevant regulatory background and the CFTC’s rationale for adopting it.  For more on the impact of Dodd-Frank on hedge fund managers, see “How Have Dodd-Frank and European Union Derivatives Trading Reforms Impacted Hedge Fund Managers That Trade Swaps?,” The Hedge Fund Law Report, Vol. 6, No. 40 (Oct. 17, 2013).

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  • From Vol. 8 No.28 (Jul. 16, 2015)

    How to Structure a Singapore-Based Hedge Fund Manager (Part One of Two)

    In recent years, Singapore has begun to attract hedge fund managers looking to establish a presence in Asia.  In its first presentation in its “Going Global” series on the formation and operation of hedge fund management companies outside the U.S., Morgan Lewis offered an overview of the relevant corporate, employment and tax laws in Singapore; its regulation of managers and fund distribution; and how other countries’ regulatory regimes affect hedge fund managers established in Singapore.  Moderated by Morgan Lewis partner Timothy W. Levin, the discussion featured partners Joo Khin Ng, Wai Ming Yap, Daniel Yong and William Yonge.  This article, the first in a two-part series, summarizes the main points raised during the presentation with respect to Singapore corporate structures, employment laws, tax laws and regulation of financial services activities.  Part two will address Singapore licensing requirements, “dual-hatting” arrangements, product distribution and the impact of U.S. and U.K. regulatory regimes on Singapore-based managers.  For more on the tax and regulatory issues involved in establishing a Singapore-based manager, see “Structuring, Regulatory and Tax Guidance for Asia-Based Hedge Fund Managers Seeking to Raise Capital from U.S. Investors (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 31 (Aug. 9, 2012).  For a discussion of the factors to consider in deciding between Hong Kong and Singapore as the location for an Asia-based office, see “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part One of Four),” The Hedge Fund Law Report, Vol. 4, No. 43 (Dec. 1, 2011).  For an overview of the process of opening an office in Singapore, see “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part Two of Four),” The Hedge Fund Law Report, Vol. 4, No. 44 (Dec. 8, 2011). 

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  • From Vol. 8 No.9 (Mar. 5, 2015)

    SEC Order Confirms the Agency’s Focus on Investment Advisers That Improperly Claim the Imprimatur of SEC Registration

    One area of the SEC’s focus in 2015 will be on managers who are ineligible for registration as investment advisers under the Investment Advisers Act but who, through fraudulent inflation of assets under management or other means, nevertheless improperly apply for and maintain such registrations.  As reported in The Hedge Fund Law Report, speaking at the Regulatory Compliance Association’s Compliance, Risk and Enforcement 2014 Symposium, Ken Joseph, associate director in the SEC’s New York Regional Office, stated that the SEC will be examining firms trying to take advantage of marketing or other benefits – perceived or actual – available only to SEC-registered investment advisers, when those firms should not be so registered.  See “RCA Compliance, Risk and Enforcement 2014 Symposium Highlights SEC Exam Priorities and Focus Areas, Mitigating Regulatory Filing Risk and Key AIFMD Issues for Non-E.U. Managers (Part One of Two),” The Hedge Fund Law Report, Vol. 8, No. 7 (Feb. 19, 2015).  In a recent action against such an improperly registered adviser, the SEC has confirmed this focus.

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  • From Vol. 7 No.44 (Nov. 20, 2014)

    Eight Important Regulatory and Operational Differences Between Managing Hedge Funds and Alternative Mutual Funds

    Participants at a recent Financial Research Associates (FRA) event analyzed eight of the most important regulatory and operational considerations in managing alternative mutual funds.  Participants also highlighted how each of those considerations applies differently to hedge funds and alternative mutual funds.  For example, both hedge funds and alternative mutual funds need to be concerned with leverage limitations.  However, the sources of such limitations, their impact on investment strategy, the operational infrastructure necessary to implement and monitor such limitations, relevant compliance issues and other dynamics are different for the different products.  While superficially similar – especially when following similar strategies – hedge and mutual funds are very different products from the perspectives of operations and regulatory compliance.  That was the core thesis of the FRA program; and this article conveys both the key points of difference and the business consequences of such product variation.  See also “The First Steps to Take When Joining the Rush to Offer Registered Liquid Alternative Funds,” The Hedge Fund Law Report, Vol. 7, No. 42 (Nov. 6, 2014); “How Can Hedge Fund Managers Organize and Operate Alternative Mutual Funds to Access Retail Capital? (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013).

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  • From Vol. 7 No.43 (Nov. 13, 2014)

    Investment, Regulatory and Operational Considerations for Hedge Fund Managers Considering Peer-To-Peer Lending

    Non-bank lenders – notably including hedge funds – are playing a growing role in the provision of credit to businesses and individuals.  This is a function of various factors: an increasingly heavy regulatory hand on banks post-crisis; higher bank capital requirements; increased risk aversion; persistently low interest rates; and regulatory changes in some jurisdictions facilitating direct lending.  See, e.g., “Irish Central Bank Issues Proposed Rules to Enable Private Funds to Originate Loans,” The Hedge Fund Law Report, Vol. 7, No. 34 (Sep. 11, 2014).  As part of this trend, hedge fund managers are exploring and in some cases lending through so-called “peer-to-peer” lending (P2PL) channels.  Whether characterized as an “asset class” or merely a new or somewhat new mechanism for an age-old practice (lending money), P2PL has received significant attention and generated cautious interest among hedge fund managers.  To clarify the discussion around P2PL, this article relates the salient points from a presentation at a recent event on peer-to-peer lending, organized by the Institute for International Research (the same entity that organizes the popular GAIM conferences on hedge fund operations).  This article specifically provides background on the forces fueling P2PL growth, outlines relevant regulatory considerations and weighs the pros and cons for hedge fund managers of participation in P2PL strategies.

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  • From Vol. 7 No.37 (Oct. 2, 2014)

    Industry Experts Discuss SEC’s Newly Adopted Revisions to Regulation AB

    SEC Regulation AB governs the offering, reporting and disclosures relating to the sale of asset-backed securities.  On August 27, 2014, the SEC approved a set of sweeping changes to Regulation AB, commonly referred to as Regulation AB II.  A panel of industry experts recently discussed the key provisions of Regulation AB II.  The program was hosted by the Asset Securitization Report and sponsored by Bingham McCutchen, LLP.  Elliott M. Kass, of SourceMedia, moderated the discussion.  The speakers were Steven Glynn, a Vice President and Counsel at Barclays; Ryan O’Connor, a Director and Counsel of Citigroup Global Markets Inc.; Ian W. Sterling, an Executive Director and Assistant General Counsel of J.P. Morgan; John Arnholz, a Partner at Bingham; and Charles Sweet, a Managing Director at Bingham.  See also “CLO 2.0: How Can Hedge Fund Managers Navigate the Practical and Legal Challenges of Establishing and Managing Collateralized Loan Obligations? (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 26 (Jun. 27, 2013).

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  • From Vol. 7 No.26 (Jul. 11, 2014)

    SEC Sanctions Fund Adviser for Violation of “Pay to Play” Rule and for Failing to Register

    Rule 206(4)-5 (Rule) under the Investment Advisers Act of 1940, commonly known as the “pay to play” rule, prohibits an investment adviser from providing paid investment advisory services to a government entity for two years after the adviser or certain of its employees or executives make a contribution to an official of the government entity.  See “Key Elements of a Pay-to-Play Compliance Program for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 3, No. 37 (Sep. 24, 2010).  In a recent administrative order, the SEC sanctioned a private fund adviser for violating the Rule.  For an example of SEC leniency for an inadvertent violation of the Rule, see “SEC Excuses a Hedge Fund Manager’s Inadvertent Violation of the Pay to Play Rule,” The Hedge Fund Law Report, Vol. 7, No. 3 (Jan. 23, 2014).

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  • From Vol. 7 No.20 (May 23, 2014)

    United Arab Emirates Implements Licensing Regime for Firms Providing Investment Management Services

    In 2000, the United Arab Emirates (UAE) established the UAE Securities and Commodities Authority (ESCA) to supervise and monitor its financial markets.  In 2012, ESCA issued regulations governing the offering of investment funds in the UAE.  It recently issued a follow-up regulation governing the offering of investment management services in the UAE.  A recent event provided an overview of the new regulation, and insight into the interpretation and scope of its provisions.  The new regulation and interpretation of it are relevant to hedge fund managers with or targeting investors or investments in the UAE.  See also “Why and How Do Middle Eastern Sovereign Wealth Funds, Pension Funds and High Net Worth Individuals Invest in Private Funds?,” The Hedge Fund Law Report, Vol. 6, No. 23 (Jun. 6, 2013).

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  • From Vol. 7 No.8 (Feb. 28, 2014)

    SEC Clarifies Scope of the “Knowledgeable Employee” Exception for Section 3(c)(1) and 3(c)(7) Funds

    Hedge funds and other private funds typically rely on the exemptions from registration set forth in Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (Act).  Section 3(c)(1) exempts from registration funds that are not planning a public offering and whose securities are owned by fewer than 100 beneficial owners.  Section 3(c)(7) exempts funds that are not planning a public offering and whose securities are owned exclusively by “qualified purchasers” (generally, persons or entities that own more than $5 million in investments).  Rule 3c-5 under the Act provides that “knowledgeable employees” of private funds (Covered Funds) or of affiliated managers of Covered Funds are not counted towards the 100 owner limit under Section 3(c)(1).  In addition, they may invest in Section 3(c)(7) funds even if they are not qualified purchasers.  The knowledgeable employee exemption is important for hedge fund managers who want to use employee participation in their funds for compensation and other purposes.  See “Conflicts and Opportunities Offered by Concurrent Management of Employee-Owned Hedge Funds and Outside-Investor Hedge Funds,” The Hedge Fund Law Report, Vol. 2, No. 32 (Aug. 12, 2009).  The Managed Funds Association (MFA) recently asked the SEC for a no-action letter with regard to several of the definitions and concepts used in Rule 3c-5.  In response, the SEC has issued a no-action letter that clarifies the concepts of “principal business unit, division or function”; “policy-making function”; and participation in “investment activities”; and makes clear that the rule may apply to knowledgeable employees of separately managed accounts and of certain related advisers.  In that regard, the SEC has provided valuable guidance on some of the open questions concerning Rule 3c-5.  See “Are the General Counsel and Chief Compliance Officer of a Hedge Fund Manager Considered ‘Knowledgeable Employees’ of the Manager?,” The Hedge Fund Law Report, Vol. 5, No. 35 (Sep. 13, 2012).  This article summarizes the SEC’s letter and the relevant portions of the MFA’s request.

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  • From Vol. 7 No.7 (Feb. 21, 2014)

    SEC No-Action Letter Suggests That There May Be Circumstances in which Recipients of Transaction-Based Compensation Do Not Have to Register as Brokers

    In combination with other facts and circumstances, the receipt of transaction-based compensation may trigger a requirement on the part of the recipient to register with the SEC as a broker.  For hedge fund managers, this requirement has been considered problematic because in-house marketing professionals may be construed as brokering securities (i.e., fund interests) and receiving compensation that is based in whole or in part on transaction volumes.  For years, this was a quiet concern among managers, but the topic acquired urgency last April when David W. Blass, Chief Counsel of the SEC’s Division of Trading and Markets, addressed it in a speech.  See “Do In-House Marketing Activities and Investment Banking Services Performed by Private Fund Managers Require Broker Registration?,” The Hedge Fund Law Report, Vol. 6, No. 16 (Apr. 18, 2013).  Since then, managers have been working to determine whether they, their in-house marketing departments or certain members of those departments need to register with the SEC as brokers, or how they should change their compensation or other practices to avoid a broker registration requirement.  See “How Can Hedge Fund Managers Structure Their In-House Marketing Activities to Avoid a Broker Registration Requirement? (Part Three of Three),” The Hedge Fund Law Report, Vol. 6, No. 37 (Sep. 26, 2013).  A recent SEC no-action letter provides further insight into the SEC’s evolving thinking on this topic.  See “Is the In-House Marketing Department of a Hedge Fund Manager Required to Register as a Broker?,” The Hedge Fund Law Report, Vol. 4, No. 10 (Mar. 18, 2011).

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  • From Vol. 6 No.48 (Dec. 19, 2013)

    RCA Symposium Offers Perspectives from Regulators and Industry Experts on 2014 Examination and Enforcement Priorities, Fund Distribution Challenges, Conducting Risk Assessments, Compliance Best Practices and Administrator Shadowing (Part Two of Three)

    Hedge fund industry experts, including regulators from the SEC and National Futures Association (NFA), recently gathered at the RCA’s Compliance, Risk & Enforcement 2013 Symposium (Symposium) to offer varied perspectives and advice on topics relevant to hedge fund managers.  This second installment in a three-part article series covering the Symposium summarizes notable points from two sessions, including: (1) the keynote address by Andrew Bowden, Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), who outlined OCIE examination priorities for hedge fund managers; and (2) another session addressing regulatory challenges confronting managers engaged in fund distribution, including the JOBS Act, broker registration, NFA oversight of hedge fund marketing practices and the EU’s Alternative Investment Fund Managers Directive.  The first article in this series covering the Symposium summarized two sessions, one on conducting effective risk assessments for hedge fund managers (including discussions of forensic testing and testing for insider trading, order allocations and best execution), and the other incorporating current and former government officials’ perspectives on expert networks, political intelligence, insider trading investigations and prosecutions and valuation-related conflicts of interest.  See “RCA Symposium Offers Perspectives from Regulators and Industry Experts on 2014 Examination and Enforcement Priorities, Fund Distribution Challenges, Conducting Risk Assessments, Compliance Best Practices and Administrator Shadowing (Part One of Three),” The Hedge Fund Law Report, Vol. 6, No. 47 (Dec. 12, 2013).  The third article will summarize key points from two sessions, one identifying regulatory risks and outlining compliance best practices with respect to use of expert networks, valuation of assets, custody and the allocation of expenses, and another providing a detailed look into fund administrator shadowing.

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  • From Vol. 6 No.47 (Dec. 12, 2013)

    ALM’s 7th Annual Hedge Fund General Counsel Summit Addresses Strategies for Handling Government Investigations, Challenges for CCOs, Distressed Debt Investing, OTC Derivatives Reforms, Insider Trading Best Practices, the JOBS Act, AIFMD and Activist Investing (Part Three of Three)

    This is the third article in our three-part series covering the 7th Annual Hedge Fund General Counsel Summit hosted by ALM Events.  This article addresses salient points from sessions on the JOBS Act, the Alternative Investment Fund Managers Directive and new regulatory developments that will impact activist investing in Canada.  The first installment discussed strategies for handling government investigations and challenges facing chief compliance officers, including dual-hatting and supervisory liability.  The second installment discussed the impact of over-the-counter derivatives reforms on fund managers (including a discussion of new mandatory trade reporting, clearing and execution requirements as well as CFTC cross border rules); opportunities and challenges associated with distressed debt investing (including a discussion of opportunities to participate in Chapter 11 proceedings, considerations in claims trading and risks of distressed debt investing); and best practices to address insider trading risks.  On insider trading, see also “Akin Gump Partners Discuss Non-U.S. Enforcement, Insider Trading in Futures, Failure to Supervise Charges and Other Evolving Insider Trading Challenges for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 45 (Nov. 21, 2013).

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  • From Vol. 6 No.44 (Nov. 14, 2013)

    Sidley Austin Private Funds Conference Addresses Recent Developments Relating to Fund Structuring and Terms; SEC Examinations and Enforcement Initiatives; Seeding Arrangements; Fund Mergers and Acquisitions; CPO Regulation; JOBS Act Implementation and Compliance; and Derivatives Reforms (Part Three of Three)

    This is the third installment in The Hedge Fund Law Report’s three-part series covering the recent Sidley Austin LLP conference entitled “Private Funds 2013: Developments and Opportunities.”  This article summarizes the key points made by presenting Sidley partners on relevant regulatory developments, including commodity pool operator registration and regulation, over-the-counter derivatives reforms and implementation and compliance with the JOBS Act.  The first article summarized conference segments on fund structuring, single-investor funds, first loss capital arrangements, side letter terms, hard wiring of feeder funds for ERISA purposes, liquidity terms, fee terms, founder share classes and expense allocations and caps.  And the second article addressed SEC examinations and enforcement, the SEC’s new policy requiring admissions of wrongdoing and best practices for compliance, seeding arrangements and fund mergers and acquisitions.

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  • From Vol. 6 No.43 (Nov. 8, 2013)

    KPMG/AIMA/MFA Survey Quantifies the Impact of the AIFMD, FATCA, Form PF and Adviser/CPO Registration on Hedge Fund Manager Compliance Budgets

    KPMG International, in cooperation with the Alternative Investment Management Association and the Managed Funds Association, recently published a report detailing findings from its survey of 200 hedge fund managers around the world who have, in the aggregate, approximately $910 billion in assets under management.  The survey generally covered the impact of recent regulatory changes on managers’ compliance expenditures, operations and product offerings.  Specifically, the survey analyzed how size and geography impact manager compliance costs; key regulatory drivers of recent increases in manager compliance expenditures; manager projections for expenditures on outside service providers; impact of regulatory developments on manager operations (including whether regulatory changes would cause a manager to stop doing business or move from a jurisdiction); and manager predictions about future offerings of registered products such as funds organized pursuant to the EU’s Undertakings for Collective Investment in Transferable Securities (UCITS) Directive, or funds registered pursuant to the U.S. Investment Company Act of 1940 (mutual funds).  See “Are Alternative Investment Strategies Within the Spirit of UCITS?,” The Hedge Fund Law Report, Vol. 5, No. 23 (Jun. 8, 2012); “Citi Prime Finance Report on Liquid Alternatives Describes a Massive Capital Raising Opportunity for Hedge Fund Managers Willing to Go Retail (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 21 (May 23, 2013).  This article summarizes key findings of the survey.

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  • From Vol. 6 No.40 (Oct. 17, 2013)

    How Have Dodd-Frank and European Union Derivatives Trading Reforms Impacted Hedge Fund Managers That Trade Swaps?

    The Practising Law Institute recently sponsored a panel highlighting the impact of derivatives reforms on managers of hedge funds that trade swaps.  Among other things, the panel addressed key product definitions, including whether certain instruments are considered “swaps”; CPO registration obligations, exemptions and other administrative relief; ongoing compliance requirements applicable to registered CPOs, including the Series 3 exam requirement; and amendments to swap trading documentation triggered by Dodd-Frank and European Union derivatives regulatory reforms.  See “Dechert Webinar Highlights Key Deal Points and Tactics in Negotiations between Hedge Fund Managers and Futures Commission Merchants regarding Cleared Derivative Agreements,” The Hedge Fund Law Report, Vol. 6, No. 16 (Apr. 18, 2013); and “A Practical Guide to the Implications of Derivatives Reforms for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 29 (Jul. 25, 2013).  This article summarizes the key insights from the discussion.  The speakers were Michael J. Drayo, Senior Counsel at investment adviser The Vanguard Group, Inc., and Susan C. Ervin, a partner in the Financial Institutions group at Davis Polk & Wardwell LLP.  See “Do You Need to Be a Registered CPO Now and What Does It Mean If You Do? (Part Two of Two),” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012).

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  • From Vol. 6 No.37 (Sep. 26, 2013)

    How Can Hedge Fund Managers Structure Their In-House Marketing Activities to Avoid a Broker Registration Requirement? (Part Three of Three)

    This is the third article in our series – occasioned, in large part, by David Blass’ April 5, 2013 speech before the American Bar Association, Trading and Markets Subcommittee – on broker registration considerations for hedge fund managers.  The first article in the series described the activities that could trigger a broker registration requirement, and the second installment distilled best industry practices for determining when compensation paid to in-house hedge fund marketers constitutes transaction-based compensation.  This article, the culmination of the analysis in the first two parts, is intended for managers that have taken a hard and candid look at their current marketing practices and determined that those practices may require broker registration.  Such managers must answer at least five critical questions: What are the relevant state broker registration requirements and the consequences for failing to comply with them?  What is involved in broker registration by a manager or an affiliate?  How can managers structure third-party broker arrangements?  How, if at all, can managers modify current marketing practices to sidestep a broker registration requirement?  And, finally, can managers obtain comfort on this topic from the SEC’s no-action process?  This article addresses each of these questions.

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  • From Vol. 6 No.35 (Sep. 12, 2013)

    How Can Hedge Fund Managers Structure Their In-House Marketing Activities to Avoid a Broker Registration Requirement?  (Part One of Three)

    In-house marketers play a central role in raising and retaining assets for hedge fund managers.  While the role means different things at different firms and even within a firm, the job of an in-house marketer often involves some combination of: directly sourcing investments; indirectly sourcing investments via investment consultants, third-party marketers and others; persuading investors to remain invested, especially during turbulent periods; persuading investors to make follow-on investments; crisis management of various kinds; management of side letter obligations; preparation of investor-facing materials (PPMs, pitchbooks, etc.); coordination of public communications, to the extent permitted by the JOBS Act and otherwise; and more.  Hedge fund managers have asked (usually in hushed tones) whether the activities of in-house marketers require the manager or its marketing department to register as a broker, or require members of the department to register as associated persons of a broker.  For years, there was essentially no regulatory activity on this topic – no enforcement actions or speeches by SEC officials – and many in the industry construed the absence of such activity as tacit approval of typical structures.  See “Is the In-House Marketing Department of a Hedge Fund Manager Required to Register as a Broker?,” The Hedge Fund Law Report, Vol. 4, No. 10 (Mar. 18, 2011).  However, an April 5, 2013 speech by David W. Blass, Chief Counsel of the SEC’s Division of Trading and Markets, indicated that regulators are aware of this issue and provided some insight into how the SEC thinks about it.  The Blass speech refocused attention on this issue and highlighted some important questions to ask, but the speech did not provide conclusive answers to the hard practical questions being asked by hedge fund managers.  See “Do In-House Marketing Activities and Investment Banking Services Performed by Private Fund Managers Require Broker Registration?,” The Hedge Fund Law Report, Vol. 6, No. 16 (Apr. 18, 2013) (analyzing the Blass speech).  In an effort to move the discussion further along and address important practice points, The Hedge Fund Law Report is publishing a three-part series outlining steps that managers can take to mitigate the risk of triggering a broker registration obligation based on in-house marketing activities.  This article, the first in the series, explores the activities that could trigger a broker registration requirement, as well as other factors that bear on the registration analysis, including the time devoted to marketing by an employee, the employee’s job title and the employee’s other responsibilities.  The second installment will evaluate whether specific types of compensation constitute “transaction-based compensation”; discuss the applicability of the Rule 3a4-1 issuer safe harbor; and advise on how managers can operate in-house marketing activities within the “spirit” of the safe harbor to minimize the risk of triggering a broker registration requirement.  The third installment will examine alternative solutions for managers looking to structure in-house marketing activities in a manner that accomplishes the fundamental business goals (most notably, capital raising) without triggering a broker registration requirement.

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  • From Vol. 6 No.35 (Sep. 12, 2013)

    Understanding the Intricacies for Private Funds of Becoming and Remaining FATCA-Compliant

    The Foreign Account Tax Compliance Act (FATCA) heralds a new world order for the disclosure of tax information related to offshore accounts.  FATCA requires Foreign Financial Institutions (FFIs), including offshore private funds, to provide tax information on accounts maintained by specified U.S. persons, recalcitrant investors or nonparticipating financial institutions.  Given the IRS’ unprecedented extraterritorial powers to gather information on FFIs operating as private funds, FATCA will impose tremendous burdens (both in terms of time and cost) on such offshore private funds.  Yet, the law offers little practical guidance on how managers can establish and maintain programs to become and remain FATCA-compliant.  With this in mind, this guest article – authored by Peter Stafford, an Associate Director at DMS Offshore Investment Services – is designed to help offshore private funds identify and address some of the challenges they face in becoming FATCA-compliant.  Among other things, this article, organized in a question and answer format, addresses: the timeline for FATCA compliance; steps necessary to register with the IRS; whether certain funds are exempt from FATCA; the roles and responsibilities of the FATCA Responsible Officer (FRO); who should serve as the FRO; FATCA reporting to regulators; components of an effective FATCA compliance program; effective investor due diligence procedures; FATCA disclosures in fund documents; insurance coverage for and indemnification of the FRO; and allocation of FATCA-related expenses between the fund and the manager.  For more background on FATCA and its obligations, see “What Impact Will FATCA Have on Offshore Hedge Funds and How Should Such Funds Prepare for FATCA Compliance?,” The Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013).

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  • From Vol. 6 No.24 (Jun. 13, 2013)

    Application of the AIFMD to Non-EU Alternative Investment Fund Managers (Part Two of Two)

    As most fund managers who either market a fund into the European Union (EU) or manage certain EU funds now know, from July 22, 2013, the EU’s Alternative Investment Fund Managers Directive (Directive or AIFMD) will impact many non-EU managers in potentially significant ways.  The preparation required can be significant.  As a result, The Hedge Fund Law Report is publishing this two-part series designed to help non-EU private fund managers understand the steps they must take to prepare for effectiveness of the AIFMD.  The first installment focused on the impact of the Directive during the period from July 2013 through 2015 – the period that first article referred to as “Stage I,” during which non-EU managers will not be fully authorized under the Directive, but nonetheless can be subject to many parts of the Directive, depending on the scope of their activities touching the EU.  See “Application of the AIFMD to Non-EU Alternative Investment Fund Managers (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 21 (May 23, 2013).  This second installment focuses on what this article refers to as the Directive’s “Stages II and III,” which are due to come into effect in 2015 or later, which contemplate a transition to full authorization under the Directive by all fund managers that are subject to the Directive’s jurisdiction.  The authors of the series are John Adams, counsel in the Asset Management Group at Shearman & Sterling LLP; Nathan Greene, a partner and Co-Practice Group Leader in Shearman’s Asset Management Group; Christian Gloger, a senior associate in the Group; and Christine Ballantyne-Drewe, an associate in the Group.

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  • From Vol. 6 No.16 (Apr. 18, 2013)

    Do In-House Marketing Activities and Investment Banking Services Performed by Private Fund Managers Require Broker Registration?

    In an April 5, 2013 speech delivered before the American Bar Association, Trading and Markets Subcommittee, David W. Blass, Chief Counsel of the SEC’s Division of Trading and Markets, cautioned private fund managers that certain in-house marketing and investment banking activities may require the manager or its personnel to register as a broker with the SEC.  The speech was in response to certain practices identified by the SEC staff during presence examinations of newly registered advisers.  See “SEC’s OCIE Director, Carlo di Florio, Discusses Examination Strategies and Expectations for Impending Examinations of Private Equity Advisers,” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012).  Blass highlighted two groups of practices that raise regulatory concerns: (1) the marketing of fund securities by a manager’s in-house personnel; and (2) “purported investment banking or other broker activities” related to a fund’s portfolio companies.  For more on the broker registration consequences of the former practice, see “Is the In-House Marketing Department of a Hedge Fund Manager Required to Register as a Broker?,” The Hedge Fund Law Report, Vol. 4, No. 10 (Mar. 18, 2011).  This article provides an overview of broker registration issues pertinent to hedge fund managers; summarizes key takeaways from Blass’ speech; and helps hedge fund managers understand and analyze their activities within the broker registration framework.

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  • From Vol. 6 No.10 (Mar. 7, 2013)

    How Can Hedge Fund Managers Identify and Navigate Pitfalls Associated with the JOBS Act’s Rollback of the Ban on General Solicitation and Advertising?

    The Jumpstart Our Business Startups Act (JOBS Act) provisions allowing general solicitation and general advertising in private offerings (JOBS Act Marketing Provisions), upon becoming effective, will profoundly change how hedge fund managers can market their funds.  Before taking advantage of the JOBS Act Marketing Provisions, however, hedge fund managers should be aware of a number of potential pitfalls.  First, hedge fund managers may be prohibited from engaging in general solicitation and general advertising if they rely on exemptions from registration under certain Commodity Futures Trading Commission rules, or under certain state and federal investment adviser laws.  Second, hedge fund managers that are able to take advantage of the provisions need to be aware of several potential compliance issues under the Investment Advisers Act of 1940, including issues that arise when using social media, publicly available websites and publicly advertised performance history.  In a guest article, Adam Gale, a Member in the New York office of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., identifies potential regulatory pitfalls associated with reliance on the JOBS Act Marketing Provisions and provides some recommendations to address compliance issues in connection with reliance on the JOBS Act Marketing Provisions.

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  • From Vol. 6 No.7 (Feb. 14, 2013)

    FATCA Implementation Summit Identifies Best Practices Relating to FATCA Reporting, Due Diligence, Withholding, Operations, Compliance and Technology

    On December 6, 2012, the Hedge Fund Business Operations Association and Financial Research Associates, LLC jointly sponsored a “FATCA Implementation Summit” in New York City (Summit).  Participants at the Summit discussed compliance requirements, recommendations and strategies in connection with the Foreign Account Tax Compliance Act (FATCA), in particular with respect to registration, reporting, due diligence and withholding.  Participants also addressed the operational and technological demands presented by FATCA, and best practices for meeting those demands.  This article summarizes the practical takeaways from the Summit and offers recommendations that hedge fund managers can apply directly to their FATCA compliance programs.

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  • From Vol. 6 No.7 (Feb. 14, 2013)

    What Does the Introduction of a Lighter Touch Fund Manager Regulatory Option in the British Virgin Islands Mean for Hedge Fund Managers?

    Historically, fund managers wishing to do business in the British Virgin Islands (BVI) have had to undergo a rigorous process of applying for a full licence (Existing Regime) pursuant to Part 1 of the Securities and Investment Business Act 2010 (SIBA).  However, the BVI recently adopted a “regulation light” fund manager regime (Lighter Touch Regime) for eligible investment managers or investment advisers who have or wish to have a BVI licence to carry out investment management or investment advisory services for funds, without being subjected to certain regulatory requirements under the Existing Regime that may be disproportionate to the scope of their operations.  Among other things, the Lighter Touch Regime, which came into effect on December 10, 2012, expedited and facilitated the manager approval process.  The Lighter Touch Regime can be attractive for managers who have investors who prefer to have their managers subject to regulation and yet wish to avoid the more stringent requirements of the Existing Regime.  In a guest article, Michael J. Burns, James McConvill and Nadia Menezes describe the evolution of SIBA fund manager regulation; the basic requirements of the Lighter Touch Regime, including manager eligibility criteria; the benefits of the Lighter Touch Regime; and the interaction between the Lighter Touch Regime and the Existing Regime.  Burns is the Managing Partner and Head of the Corporate and Commercial department in the BVI office of Appleby; McConvill is a consultant to Appleby in the BVI; and Menezes is a Senior Associate at Appleby in the BVI.

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  • From Vol. 6 No.6 (Feb. 7, 2013)

    How Can Hedge Fund Managers Organize and Operate Alternative Mutual Funds to Access Retail Capital? (Part Two of Two)

    Alternative mutual funds present opportunities for hedge fund managers to diversify their product offerings and to attract retail investors.  At the same time, retail investors are clamoring for opportunities to invest with the most talented investment professionals, many of which are attracted to working with hedge fund firms.  However, hedge fund managers that launch alternative mutual funds face significant business challenges and regulatory concerns unique to the registered fund world.  This two-part article series is designed to familiarize hedge fund managers with alternative mutual funds and to help them determine whether it is advisable to launch such funds.  This second article details specific steps necessary to launch an alternative mutual fund; costs and fees associated with launching and operating an alternative mutual fund; distribution of alternative mutual funds; investment restrictions applicable to alternative mutual funds; and a key conflict of interest hedge fund managers face when operating alternative mutual funds and traditional hedge funds side-by-side.  The first installment discussed the structure of alternative mutual funds; the investment strategies typically employed by alternative mutual funds; why hedge fund managers consider launching alternative mutual funds; some drawbacks of launching alternative mutual funds; and the various ways in which hedge fund managers can participate in the alternative mutual fund business.  See “How Can Hedge Fund Managers Organize and Operate Alternative Mutual Funds to Access Retail Capital? (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013).

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  • From Vol. 6 No.6 (Feb. 7, 2013)

    CPO Compliance Series: Registration Obligations of Principals and Associated Persons (Part Three of Three)

    Commodity pool operators (CPOs) that are registered, or registering, with the U.S. Commodity Futures Trading Commission (CFTC) and that are, or are becoming, members of the National Futures Association (NFA), need to comply with numerous CFTC and NFA requirements.  One of the key compliance obligations is the requirement for a CPO to (1) list its principals on its registration application with the NFA (Form 7-R) and (2) register its associated persons (APs) with the NFA (Form 8-R) and submit a Form 8-R for each natural person principal so that the NFA can perform a background check.  This article details who or what is a principal and who is an AP; outlines the process for registration of APs and listing of natural person principals; and describes some basic supervisory obligations applicable to APs and principals as employees of the CPO and provides some general guidance on how to comply with those supervisory obligations.  This article is the third of a three-part series of articles that focuses in detail on various compliance obligations of CPOs under CFTC and NFA regulations and guidance.  The first article covered NFA Bylaw 1101, which addresses conducting business with non-NFA members.  See “CPO Compliance Series – Conducting Business with Non-NFA Members (NFA Bylaw 1101) (Part One of Three),” The Hedge Fund Law Report, Vol. 5, No. 34 (Sep. 6, 2012).  The second article covered the various prohibitions and guidelines for marketing activities and promotional materials for both CPOs and commodity trading advisors under various CFTC regulations and NFA compliance rules.  See “CPO Compliance Series – Marketing and Promotional Materials (Part Two of Three),” The Hedge Fund Law Report, Vol. 5, No. 38 (Oct. 4, 2012).  For additional coverage of each of these topics and other relevant topics, see “Do You Need to Be a Registered Commodity Pool Operator Now and What Does it Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  The authors of this article and the other articles in this series are Stephen A. McShea, General Counsel and Chief Compliance Officer of Larch Lane Advisors LLC; Cary J. Meer, a partner at K&L Gates LLP; and Lawrence B. Patent, of counsel at K&L Gates LLP.

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  • From Vol. 5 No.48 (Dec. 20, 2012)

    CFTC Grants Additional Relief from CPO Regulation for Operators of Certain Securitization Vehicles

    On December 7, 2012, the CFTC’s Division of Swap Intermediary Oversight issued a letter expanding the scope of relief from commodity pool regulation for certain securitization and structured finance vehicles and their operators.  This article summarizes the guidance and relief granted in the letter.  See also “NFA Workshop Details the Registration and Regulatory Obligations of Hedge Fund Managers That Trade Commodity Interests,” The Hedge Fund Law Report, Vol. 5, No. 47 (Dec. 13, 2012).

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  • From Vol. 5 No.47 (Dec. 13, 2012)

    NFA Workshop Details the Registration and Regulatory Obligations of Hedge Fund Managers That Trade Commodity Interests

    The National Futures Association (NFA) held a workshop (workshop) in New York on October 23, 2012 to help commodity pool operators (CPOs) and commodity trading advisors (CTAs) – including hedge fund managers that trade commodity interests – determine whether they must register with the U.S. Commodity Futures Trading Commission and the NFA, and to understand their regulatory obligations if they are required to do so.  Topics discussed during the workshop included popular CPO and CTA registration exemptions; reporting requirements for registrants, including those related to disclosure documents and financial reports; requirements related to promotional materials and sales practices for registrants; and the NFA audit process.  This article provides feature length coverage of the key topics discussed during the workshop.

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  • From Vol. 5 No.46 (Dec. 6, 2012)

    CFTC Grants Permanent No-Action Relief from CPO Registration for Family Offices and Temporary No-Action Relief for Operators of Funds of Funds

    The February 2012 CFTC rule amendments implementing provisions of the Dodd-Frank Act raised many questions concerning the obligations of fund of fund operators and family offices to register as commodity pool operators (CPOs) with the CFTC, particularly in light of the rescission of the Rule 4.13(a)(4) registration exemption relied upon by many fund of fund operators and family offices.  Recognizing that many fund of fund operators and family offices may need to register as CPOs with the CFTC by December 31, 2012, on November 29, 2012, the Division of Swap Intermediary Oversight (Division) of the CFTC issued two no-action letters, one granting temporary relief from CPO registration for operators of funds of funds and one granting permanent no-action relief for family offices.  However, the relief for fund of fund operators and family offices is not self-executing as potential claimants must make an electronic notice filing with the CFTC and satisfy other conditions to claim the relief.  This article outlines the relief granted by the Division in its no-action letters and the conditions that fund of fund operators and family offices must satisfy to claim such relief.  See also “Practising Law Institute Panel Discusses Sweeping Regulatory Changes for Hedge Fund Managers That Trade Swaps,” The Hedge Fund Law Report, Vol. 5, No. 45 (Nov. 29, 2012).

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  • From Vol. 5 No.45 (Nov. 29, 2012)

    Practising Law Institute Panel Discusses Sweeping Regulatory Changes for Hedge Fund Managers That Trade Swaps

    The Practising Law Institute recently hosted its “Hedge Funds 2012: Strategies and Structures for an Evolving Marketplace” program, which included a panel entitled “Trading Issues Relating to Swaps Under Dodd-Frank: The CFTC’s Expanded Registration Requirements for Commodity Pool Operators.”  This panel provided a comprehensive overview of the business consequences for buy-side swaps market participants (such as hedge fund managers that trade swaps) of the regulatory changes caused by the Dodd-Frank Act.  This article summarizes the notable insights from the panel discussion, including coverage of which entities must register as commodity pool operators (CPOs) or commodity trading advisors (CTAs) based on their swaps trading activity; the registration exemptions available to such CPOs and CTAs; certain regulations governing CPOs and CTAs that are required to register; and the regulations governing trading and clearing of swaps.  See also “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do?  (Part Two of Two),” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012).

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  • From Vol. 5 No.44 (Nov. 21, 2012)

    How Can Fund Managers Address the Regulatory, Compliance, Privacy and Ethics Issues Raised by Social Media?

    On November 28, 2012 – a week from today – Richards Kibbe & Orbe LLP (RKO), Berkeley Research Group (BRG) and The Hedge Fund Law Report will host a complimentary, CLE-eligible webinar entitled “How can fund managers address the regulatory, compliance, privacy and ethics issues raised by social media?”  Topics to be covered in the webinar include: tapping into the benefits of social media for hedge fund advisory businesses while maintaining necessary control and oversight; navigating the complexities of user privacy, regulatory compliance and ethics; components of a model social media policy for fund managers; and implications of the Jumpstart Our Business Startups (JOBS) Act and rules for social media use.  The participants in the webinar will be: Eva Marie Carney, a partner in the Washington, D.C. office of RKO; James Walker, a partner in the New York office of RKO; Charles Lundelius, a director at BRG; and Karina Bjelland, a managing consultant in BRG’s Financial Institutions Practice.  Michael Pereira, publisher of The Hedge Fund Law Report, will moderate the discussion.  To register for the event, please click here.  As a preview of the material to be discussed during the webinar, The Hedge Fund Law Report conducted a comprehensive interview with the four participants.  Our interview covered, among other topics: the definition of social media; ways in which hedge fund managers are using social media; authority governing the use by fund managers of social media; the chief ways in which the JOBS Act will impact the use by private fund managers of social media; whether the prohibition on public offerings in Sections 3(c)(1) and 3(c)(7) of the Investment Company Act will curtail the expanded solicitation and advertising rights granted by the JOBS Act; the tension between the CFTC’s “de minimis” exception from commodity pool operator registration requirements and the JOBS Act; steps to be taken by a private fund manager to ascertain the “accredited” status of investors sourced via social media; rules governing a fund manager’s recordkeeping obligations with respect to social media; best practices with respect to mobile devices; the interaction between federal and state privacy laws and monitoring and archiving of employee social media communications; insider trading concerns raised by social media; and social media activity that may fall within the ambit of the SEC’s rules on testimonials.  The full text of our interview with Carney, Walker, Lundelius and Bjelland is included in this issue of The Hedge Fund Law Report.

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  • From Vol. 5 No.41 (Oct. 25, 2012)

    CFTC Grants Temporary Relief from CPO and CTA Registration to Certain Hedge Fund Managers that Trade Swaps

    The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) established a comprehensive new regulatory framework for swaps and security-based swaps which would bring many market participants within the ambit of CFTC regulation, including requiring numerous entities to register with the CFTC.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do?  (Part Two of Two),” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012).  Hedge fund managers were principally concerned that the inclusion of swaps as “commodity interests” would cause their hedge funds to be treated as “commodity pools,” which in turn could subject the hedge fund manager to compliance and registration obligations as a commodity pool operator (CPO) or a commodity trading advisor (CTA).  This concern was amplified when the CFTC and SEC jointly adopted rules refining the definition of the term “swap” and related terms, on August 13, 2012.  Specifically, the August 13 rules required hedge fund managers to determine whether their swaps-related activities would subject them to CFTC regulation and require them to register as a CPO or CTA by October 12, 2012, the effective date of the rules.  In light of the complexity of the definitions and the business arrangements to which the definitions applied, many hedge fund managers struggled to arrive at a conclusive determination.  See “CFTC Issues Responses to Frequently Asked Questions Concerning Registration Exemption Eligibility and Compliance Obligations for Commodity Pool Operators and Commodity Trading Advisors,” The Hedge Fund Law Report, Vol. 5, No. 32 (Aug. 16, 2012).  Fortunately for managers grappling with this issue, on October 11 and 12, 2012, the CFTC issued two no-action letters relevant to the registration obligations of hedge fund managers that trade swaps.  This article summarizes the key practical points arising out of the two no-action letters for hedge fund managers that trade foreign exchange and other swaps and foreign exchange forwards.

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  • From Vol. 5 No.37 (Sep. 27, 2012)

    So You Don’t Want to Take the Series 3 Exam?  Alternatives to the General Proficiency Requirement for Associated Persons of Commodity Pool Operators and Commodity Trading Advisors

    Recent amendments to U.S. Commodity Futures Trading Commission (CFTC) rules have required many hedge fund firms to confront the prospect of registering with the CFTC as a commodity pool operator (CPO) and/or commodity trading advisor (CTA).  Notably, the CFTC in February announced the rescission of Rule 4.13(a)(4), a CPO registration exemption that for years has allowed hedge funds to trade without limitation in CFTC-regulated “commodity interests” (i.e., futures contracts, options on futures, retail f/x transactions and, effective October 12, 2012, many types of swaps).  Going forward, most U.S. hedge fund firms that operate funds for which they cannot rely on the alternative CPO registration exemption in Rule 4.13(a)(3) – which imposes significant limits on a fund’s commodity interest trading – will have little choice but to register with the CFTC.  For firms registered as investment advisers with the U.S. Securities and Exchange Commission, many aspects of the CFTC registration process, as well as certain ongoing recordkeeping, reporting and disclosure obligations, will be familiar.  But one area where the CFTC requirements for registered CPOs and CTAs depart significantly from the norms of SEC investment adviser regulation is the general requirement that a CFTC registrant’s marketing personnel (so-called “associated persons” or APs) satisfy certain proficiency testing requirements – in general, timely passage of the “Series 3” examination.  In a guest article, Sean Finley, Jared Gianatasio and Nathan Greene summarize the scope of a CPO’s or CTA’s personnel who will be APs generally subject to the Series 3 proficiency requirement and highlight several exemptions and proficiency testing alternatives that can offer relief from that requirement.  Finley is a partner, Gianatasio is a senior associate and Greene is a partner and Co-Practice Group Leader in Shearman & Sterling LLP’s Asset Management Group.

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  • From Vol. 5 No.35 (Sep. 13, 2012)

    AIMA Canada Handbook Provides Roadmap for Hedge Fund Managers Doing Business in Canada

    Pershing Square’s successful proxy contest for control of Canadian Pacific Railway is the most prominent recent example, but by no means the only example, of the increasing importance of Canada for hedge fund managers.  See also “Ontario Securities Commission Sanctions Hedge Fund Manager Sextant Capital Management and its Principal for Breach of Fiduciary Duty,” The Hedge Fund Law Report, Vol. 5, No. 24 (Jun. 14, 2012).  Specifically, Canada is growing in importance as a place where hedge fund managers may invest, raise capital and recruit talent.  In an effort to assist hedge fund managers in navigating the Canadian tax and regulatory landscape, AIMA Canada, a chapter of the Alternative Investment Management Association (AIMA), recently published the AIMA Canada Handbook (Handbook).  This article summarizes the key topics covered in the Handbook, including a background discussion of the Canadian securities industry; registration requirements for fund managers operating in Canada; regulations applicable to registrants; exemptions from fund manager registration; tax consequences for hedge funds and investors; structuring Canadian hedge funds; and the outlook for the Canadian hedge fund industry, including an update on the capital raising environment.

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  • From Vol. 5 No.34 (Sep. 6, 2012)

    JOBS Act: Proposed SEC Rules Would Dramatically Change Marketing Landscape for Hedge Funds

    When the JOBS Act (formally the Jumpstart Our Business Startups Act) was signed by President Obama in April, it directed that one of its most transformational provisions – the relaxation of decades-long limits on public offerings of unregistered securities – not go into effect until the Securities and Exchange Commission (SEC) set rules to implement the changes.  Though the SEC was given 90 days, or until July 5, the agency did not act until almost two months after the deadline.  As summer wound down, emotions surrounding the law flared, with a spate of increasingly strident public comment letters filed with the SEC.  Some letters attacked the entire premise of the JOBS Act and urged all manner of burdensome add-ons, while others demanded that the SEC implement the Act without delay and with a minimum of new obligations.  The proposed rules emerged on August 29, with nods to both sides of the debate.  In a guest article, Nathan Greene, a partner and Deputy Practice Group Leader in the Asset Management Group at Shearman & Sterling LLP, discusses the background of the JOBS Act; the proposed rules; special regulatory considerations for investment funds (including considerations under the Investment Advisers Act, Investment Company Act, Commodity Futures Trading Commission rules and Regulation S); factors that may be relevant in assessing the reasonableness of steps taken by investment managers to verify the accredited status of investors; the political debate surrounding the JOBS Act and the rules thereunder; and adjacent regulation that investment managers would do well to keep in mind when adjusting their approaches to marketing in light of the JOBS Act rules.

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  • From Vol. 5 No.32 (Aug. 16, 2012)

    CFTC Issues Responses to Frequently Asked Questions Concerning Registration Exemption Eligibility and Compliance Obligations for Commodity Pool Operators and Commodity Trading Advisors

    On August 14, 2012, the staff of the Commodity Futures Trading Commission (CFTC) Division of Swap Dealer and Intermediary Oversight issued responses to a number of questions raised by market participants in the aftermath of recent amendments to CFTC rules and regulations, which impacted the registration status and compliance obligations of many commodity pool operators (CPOs) and commodity trading advisors, particularly in light of the elimination of the Rule 4.13(a)(4) CPO registration exemption.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  These responses provide answers to registration and compliance questions in a variety of areas.  This article summarizes the guidance that is most pertinent to hedge fund managers.

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  • From Vol. 5 No.30 (Aug. 2, 2012)

    China Launches Landmark Reforms Impacting Hedge Fund Capital Raising, Investments and Operations

    The Chinese government and securities regulators recently undertook a series of historic reforms aimed at dismantling regulations that separate China from international markets.  The first and boldest initiative, the Qualified Domestic Limited Partner Program, has vast potential to enable foreign hedge fund managers and other institutional investors to raise Renminbi (RMB)-denominated funds in mainland China.  See “Local Currency Hedge Funds Expand Marketing and Investment Opportunities, but Involve Currency Hedging and Other Challenges,” The Hedge Fund Law Report, Vol. 3, No. 1 (Jan. 6, 2010).  The second initiative, a trial scheme in the prosperous coastal city of Wenzhou, allows residents to invest funds abroad and facilitates the conversion of underground private lenders into loan companies servicing small and medium-sized enterprises.  The third set of reforms expands the Qualified Foreign Institutional Investor program, enabling foreign hedge funds managers and other institutional investors to invest more easily in Chinese markets.  The fourth initiative, the Renminbi Qualified Foreign Institutional Investor scheme, allows Hong Kong-based arms of major Chinese asset managers and securities companies to raise capital from foreign investors that can then be directly invested into mainland China’s markets.  On the flip side, The National People’s Congress is also proposing to implement significant regulations for private funds and their managers by amending the 2004 Securities Investment Funds Law.  This article summarizes key highlights of each of these initiatives.  See also “Questions Hedge Fund Managers Need to Consider Prior to Making Investments in Chinese Companies,” The Hedge Fund Law Report, Vol. 4, No. 21 (Jun. 23, 2011).

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  • From Vol. 5 No.28 (Jul. 19, 2012)

    CFTC Expands Relief from Registration for Eligible Commodity Pool Operators and Commodity Trading Advisors through December 31, 2012

    On July 13, 2012, the Division of Swap Dealer and Intermediary Oversight of the U.S. Commodity Futures Trading Commission (CFTC) published a no-action letter issued on July 10, 2012 (no-action letter) that grants certain eligible commodity pool operators (CPOs) of newly launched pools and commodity trading advisors (CTAs) relief from having to register with the CFTC through December 31, 2012.  The relief comes on the heels of the CFTC’s February 9, 2012 adoption of a number of rule amendments, including the rescission of the Rule 4.13 exemption from CPO registration relied upon by many hedge fund managers, which became effective on April 24, 2012.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012); “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part Two of Two),” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012).  This article describes the no-action relief granted to CPOs and CTAs; outlines the steps that CPOs and CTAs must take to claim such exemptive relief; and highlights the ramifications stemming from the no-action relief granted.

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  • From Vol. 5 No.23 (Jun. 8, 2012)

    Recent Cayman Islands Developments Impacting Fund Governance, Master Fund Registration and the Insolvency Regime: An Interview with Neal Lomax, Simon Dickson and Simon Thomas of Mourant Ozannes

    Cayman Islands legislators and courts have been increasingly active in enacting reforms and deciding cases with relevance to hedge fund managers and fund investors.  The Hedge Fund Law Report recently interviewed Neal Lomax, Simon Dickson and Simon Thomas of Mourant Ozannes’ Cayman office to get their perspective on this recent activity.  Specifically, our interview covered developments and market practice with respect to: fund governance in the aftermath of the Cayman Grant Court’s decision in Weavering; recent legislative developments, including the new registration regime for Cayman-domiciled master funds; and recent judicial decisions that reshape the Cayman fund insolvency regime.  This article contains the full text of our interview.

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  • From Vol. 5 No.21 (May 24, 2012)

    CFTC and SEC Adopt Long-Awaited Rules Excluding Most Hedge Funds from Swap Dealer Registration Requirements

    The Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) recently adopted final rules defining the types of entities that will be required to register as swap dealers, security-based swap dealers, major swap participants (MSPs) and major security-based swap participants (MSSPs) under the Dodd-Frank Wall Street Reform and Consumer Protection Act.  These entities will be required to register with the CFTC or the SEC and adhere to a wide variety of new requirements with respect to their derivatives trading, including capital, margin, reporting and business conduct requirements.  The CFTC and the SEC defined “swap dealer” and “security-based swap dealer” narrowly, thereby including for the most part only traditional dealers in the over-the-counter derivatives market and excluding most hedge funds and other buy-side participants who are not undertaking traditional dealing activities.  The final rules also set a high bar for the MSP and MSSP categories, excluding most hedge funds and hedge fund advisers from the requirement to register as an MSP or an MSSP.  The CFTC also adopted a revised definition of “eligible contract participant” (ECP).  The final rule exempts most hedge funds from the requirement that each investor in the fund be an ECP in order for the fund to be able to enter into off-exchange foreign currency transactions without satisfying certain requirements under the CFTC’s retail foreign exchange rules.  In a guest article, Leigh Fraser and Molly Moore, Partner and Associate, respectively, in the Hedge Funds group of Ropes & Gray LLP, provide a detailed analysis of the final rules and their application to hedge funds and hedge fund managers.

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  • From Vol. 5 No.19 (May 10, 2012)

    Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do?  (Part Two of Two)

    On February 9, 2012, the Commodity Futures Trading Commission (CFTC) amended the CFTC Rules to rescind an exemption from commodity pool operator (CPO) registration heavily relied upon by hedge fund managers.  This development, in combination with statutory changes to the Commodity Exchange Act enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act, will require many hedge fund managers to register as CPOs.  This article is the second part of a two-part series by Stephen A. McShea, General Counsel and Chief Compliance Officer of Larch Lane Advisors LLC, providing an overview of the current regulatory landscape of CFTC regulations impacting CPOs.  Part one of this series focused on the managers of private funds and their CPO registration and compliance obligations.  In particular, part one discussed: the regulatory framework governing commodity pools and CPOs and the remaining exemption from CPO registration for managers who operate or control a private fund; the compliance obligations of a registered CPO; and the enforcement mechanisms and penalties for non-compliance.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do?  (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  This part two focuses on the funds (i.e., commodity pools) operated or controlled by registered CPOs.  Specifically, this article discusses: general fund disclosure and reporting obligations applicable to CPOs; the exemptions from certain of those disclosure and reporting obligations available under CFTC Rules 4.7 and 4.12; and the reporting obligations applicable to funds operating under those exemptions.

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  • From Vol. 5 No.18 (May 3, 2012)

    How Do New Commodities Regulations Impact Hedge Fund Managers with Respect to Registration, Marketing, Trading, Audits and Drafting of Governing Documents?

    On February 9, 2012, the U.S. Commodity Futures Trading Commission (CFTC) rescinded an exemption from commodity pool operator (CPO) registration found in CFTC Rule 4.13(a)(4) that was previously heavily relied upon by many hedge fund managers.  The rescission of that exemption also narrowed the availability of an exemption from commodity trading adviser (CTA) registration found in CFTC Rule 4.14(a)(8) which was also relied upon heavily by many hedge fund managers.  As such, many hedge fund managers will need to register as CPOs or CTAs with the CFTC, become members of the National Futures Association (NFA) and become subject to CFTC and NFA regulations.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  Bearing this in mind, law firm Kleinberg, Kaplan, Wolff & Cohen, P.C. (KKWC) and hedge fund administrator CACEIS jointly hosted a webinar (Webinar) on April 19, 2012 to outline changes in the regulatory regime for CPOs and CTAs.  During the Webinar, Martin D. Sklar, a Member of KKWC, and Darren J. Edelstein, an Associate at KKWC, shared their expertise on numerous topics, including a discussion of the remaining exemptions from CPO and CTA registration for hedge fund managers; the steps taken to register a CPO or a CTA and its respective principals and associated persons; the various CFTC and NFA regulations impacting CPOs and CTAs; and the reporting requirements applicable to registered CPOs and CTAs, including completion and filing of Form CPO-PQR and CTA-PR.  The Hedge Fund Law Report interviewed Sklar and Edelstein following the Webinar to conduct a deeper dive into some of the topics discussed during the Webinar, including a discussion of: the Rule 4.13(a)(3) de minimis exemption; which hedge fund management entities should register as CPOs and CTAs; what marketing, trading and other regulations affect registered CPOs and CTAs; whether and to what extent registered CPOs and CTAs are subject to CFTC and NFA audit; whether hedge fund managers must add additional disclosures or change their subscription documents to allow them to comply with CFTC and NFA regulations; and the biggest challenges hedge fund managers face with respect to registering as a CPO or CTA and becoming subject to CFTC and NFA regulations.

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  • From Vol. 5 No.15 (Apr. 12, 2012)

    SEC Provides Limited Relief to Newly Registered Hedge Fund Managers With Respect to the Inclusion of Mandated Provisions in Their Advisory Contracts

    On April 5, 2012, the U.S. Securities and Exchange Commission (SEC) granted newly registered investment advisers, including hedge fund managers, limited relief from the requirement in Sections 205(a)(2) and 205(a)(3) of the Investment Advisers Act of 1940 to include certain contractual provisions in their existing advisory contracts with clients.  This article describes the relief granted, the conditions under which such relief is made available and recommendations for hedge fund managers seeking to claim such relief.

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  • From Vol. 5 No.10 (Mar. 8, 2012)

    ACA Webcasts Detail Exempt Reporting Adviser Qualifications and Compliance Obligations

    While the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) repealed the exemption from registration found in Section 203(b)(3) of the Investment Advisers Act of 1940 (Advisers Act) historically relied upon by most hedge fund managers with fewer than 15 clients, it created several more narrowly tailored adviser registration exemptions, including separate exemptions for advisers solely to venture capital funds and advisers solely to private funds with aggregate regulatory assets under management (Regulatory AUM) of less than $150 million (private fund adviser exemption).  See “Registration, Reporting, Disclosure and Operational Consequences for Hedge Fund Managers of the SEC’s New ‘Regulatory Assets Under Management’ Calculation,” The Hedge Fund Law Report, Vol. 5, No. 9 (Mar. 1, 2012).  These advisers now fall into a newly created class of advisers called exempt reporting advisers.  Although exempt reporting advisers are exempt from SEC registration, they are nonetheless required to fulfill certain regulatory obligations not applicable to unregistered advisers, including completing certain items in Part 1A of Form ADV, maintaining certain books and records and submitting to SEC examinations.  Exempt reporting advisers are also subject to other compliance obligations imposed by the Advisers Act, including the pay-to-play restrictions contained in Rule 206(4)-5.  See “Key Elements of a Pay-to-Play Compliance Program for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 3, No. 37 (Sep. 24, 2010).  With this in mind, the ACA Compliance Group (ACA) held two separate webcasts to highlight issues important to advisers that may qualify as exempt reporting advisers.  This article summarizes some of the highlights from both webcasts with relevance to hedge fund managers.

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  • From Vol. 5 No.9 (Mar. 1, 2012)

    Registration, Reporting, Disclosure and Operational Consequences for Hedge Fund Managers of the SEC’s New “Regulatory Assets Under Management” Calculation

    The SEC’s newly-adopted assets under management (AUM) calculation, known as an investment adviser’s “regulatory assets under management” (Regulatory AUM), will have numerous important regulatory implications for hedge fund managers.  Among other things, the calculation will govern whether the manager must or may register with the SEC as an investment adviser; whether the manager must file Form ADV; and which parts, if any, of Form PF the manager must complete and file.  See “Former SEC Commissioner Paul Atkins Discusses the Big Issues Raised by Form PF: Law, Operations, Confidentiality, Risk Management, Disclosure, Enforcement and Policy,” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  Unfortunately for many hedge fund managers, the calculation of a firm’s Regulatory AUM is quite different from the calculation of the firm’s traditional AUM.  Also, in certain circumstances, large hedge fund managers may need to calculate their Regulatory AUM for each month.  Therefore, hedge fund managers must understand their Regulatory AUM and arrange to have it calculated in a timely fashion to ensure that they will comply with applicable registration and reporting requirements.  This article begins by defining Regulatory AUM and discussing how to calculate it.  The article then discusses the applicability of a firm’s Regulatory AUM with respect to the hedge fund adviser registration regime; the various exemptions from adviser registration; and the various new reporting obligations imposed on hedge fund advisers, including those relating to Form PF.  The article concludes with an analysis of some of the challenges associated with Regulatory AUM and specific guidance on navigating such challenges.

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  • From Vol. 5 No.9 (Mar. 1, 2012)

    National Futures Association COO Dan Driscoll Discusses Registration, Reporting and Related Challenges Facing Hedge Fund Managers with Strategies Involving Commodities or Derivatives

    Hedge fund managers with strategies that involve commodities or derivatives are facing complicated new registration and reporting requirements.  On the registration side, on February 9, 2012, the Commodity Futures Trading Commission (CFTC) adopted final rules that rescinded the CFTC Rule 4.13(a)(4) exemption from commodity pool operator (CPO) registration that has been heavily relied upon by many hedge fund managers and their affiliates.  See “CFTC Adopts Final Rules That Are Likely to Require Many Hedge Fund Managers to Register as Commodity Pool Operators,” The Hedge Fund Law Report, Vol. 5, No. 7 (Feb. 16, 2012).  As a result, many hedge fund managers will either have to qualify for another exemption from CPO registration (most likely the Rule 4.13(a)(3) exemption for de minimis commodity interest trading activity), or register as a CPO.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  On the reporting side, with the adoption of new CFTC Rule 4.27(d), CPOs that manage private funds and that are dually registered with the SEC as investment advisers and with the CFTC as CPOs will need to complete Form PF, which requires detailed information about the private funds managed by the adviser/CPO.  See “Form PF: Operational Challenges and Strategic, Regulatory and Investor-Related Implications for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 4 (Jan. 26, 2012).  With these registration, reporting and related challenges in mind, a session at the Regulatory Compliance Association’s Spring 2012 Regulation & Risk Thought Leadership Symposium will identify and address critical issues and pitfalls with respect to Form PF.  That Symposium will be held on April 16, 2012 at the Pierre Hotel in New York.  For more information, click here.  To register, click here.  (Subscribers to The Hedge Fund Law Report are eligible for discounted registration.)  One of the anticipated speaking faculty members for the Form PF session at the RCA Symposium is Dan Driscoll, the Chief Operating Officer of the National Futures Association (NFA).  We recently interviewed Driscoll, who spoke with The Hedge Fund Law Report about Form PF and other issues related to CFTC and NFA regulation of hedge fund managers.  Specifically, our interview covered topics including: interpretational and operational issues related to qualification for the Rule 4.13(a)(3) de minimis exemption from CPO registration; the applicability of the relief granted under Rule 4.7 to hedge fund managers; the NFA examination and enforcement paradigm, including questions about how registrants are targeted for examination, what are the focus areas for NFA audits and how audits can lead to NFA enforcement activity; prospective NFA regulation of swap dealers and major swap participants; and Form PF, including issues related to the use of Form PF data for NFA enforcement activity, interpretation and confidentiality.

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  • From Vol. 5 No.8 (Feb. 23, 2012)

    Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do?  (Part One of Two)

    In light of recent CFTC rule amendments repealing the exemption from CPO registration most commonly relied upon by managers of private funds (Rule 4.13(a)(4)), now, more than ever before, it is critical for managers who operate or control private funds to understand: (1) if they must become a registered CPO; and (2) what it means for the operation of their firms and their funds if they do.  See “CFTC Adopts Final Rules That Are Likely to Require Many Hedge Fund Managers to Register as Commodity Pool Operators,” The Hedge Fund Law Report, Vol. 5, No. 7 (Feb. 16, 2012).  In this article – the first of a two-part series – Stephen A. McShea, General Counsel and Chief Compliance Officer of Larch Lane Advisors LLC, provides an overview of the current regulatory landscape of Commodity Futures Trading Commission (CFTC) regulation of commodity pool operators (CPOs).  Specifically, McShea discusses: the regulatory framework governing commodity pools and CPOs, and the remaining exemption from CPO registration for managers who operate or control a private fund; the compliance obligations of a registered CPO; and the enforcement mechanisms and penalties for non-compliance.  This article also provides a quick-reference compliance checklist for registered CPOs.  Part two of this series will discuss exemptions available to the funds (i.e., commodity pools) operated by registered CPOs that provide relief from some of the disclosure and periodic reporting obligations to which the funds would otherwise be subject.  For additional insight from McShea, see “What Do Hedge Fund Managers Need to Know to Prepare For, Handle and Survive SEC Examinations?  (Part Two of Three),” The Hedge Fund Law Report, Vol. 4, No. 5 (Feb. 10, 2011).

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  • From Vol. 5 No.7 (Feb. 16, 2012)

    How Should Hedge Fund Managers Determine Which of Their Advisory Affiliates Should Register with the SEC?

    On January 18, 2012, the SEC’s Division of Investment Management (Staff) issued a no-action letter in response to a request for guidance from the ABA Subcommittee on Hedge Funds seeking confirmation as to whether certain affiliates of an investment adviser must separately register with the SEC.  This article discusses the Staff guidance in detail and outlines the implications of the guidance for hedge fund managers.

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  • From Vol. 5 No.7 (Feb. 16, 2012)

    CFTC Adopts Final Rules That Are Likely to Require Many Hedge Fund Managers to Register as Commodity Pool Operators

    On February 9, 2012, the Commodity Futures Trading Commission (CFTC) adopted final rules (Final Rules) amending Part 4 of its regulations promulgated under the Commodity Exchange Act governing commodity pool operators (CPOs) and commodity trading advisers (CTAs).  Notably for hedge funds, the Final Rules, among other things, rescind the exemption from CPO registration contained in Rule 4.13(a)(4), which is relied on substantially in the hedge fund industry.  Notably for hedge funds, the Final Rules differ from the rule amendments proposed by the CFTC (Proposed Rules) on January 26, 2011, in that the Final Rules do not rescind the exemption from CPO registration under Rule 4.13(a)(3) for hedge funds that conduct a de minimis amount of trading in futures, commodity options and other commodity interests.  For an in-depth discussion of the Proposed Rules, see “CFTC Proposes New Reporting and Compliance Obligations for Commodity Pool Operators and Commodity Trading Advisers and Jointly Proposes with the SEC Reporting Requirements for Dually-Registered CPO and CTA Investment Advisers to Private Funds,” The Hedge Fund Law Report, Vol. 4, No. 5 (Feb. 10, 2011).  As a result, unless an exemption is otherwise available, the Final Rules will require a CPO to register with the National Futures Association if the managed commodity pool (i.e., hedge fund) conducts more than a de minimis amount of speculative trading in futures, commodity options and other commodity interests; and CPO registration imposes significant obligations on registrants.  This article provides a detailed summary of the CFTC’s Final Rules and highlights relevant changes from the Proposed Rules.  The article focuses on the provisions of the Final Rules with most direct application to hedge fund managers following commodities-focused investment strategies.

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  • From Vol. 5 No.3 (Jan. 19, 2012)

    Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part Four of Four)

    This article is the fourth in a four-part series by Maria Gabriela Bianchini, founder of Optionality Consulting.  The first article in this series identified factors that hedge fund managers should consider in determining whether to open an office in Asia and compared the relative merits of Hong Kong and Singapore as locations for an office.  See “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part One of Four),” The Hedge Fund Law Report, Vol. 4, No. 43 (Dec. 1, 2011).  The second article in this series discussed technical steps and considerations for the actual process of opening an office in either Hong Kong or Singapore.  See “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part Two of Four),” The Hedge Fund Law Report, Vol. 4, No. 44 (Dec. 8, 2011).  The third article in this series described the practical impact of Singapore’s new regulatory regime on hedge fund managers.  See “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part Three of Four),” The Hedge Fund Law Report, Vol. 4, No. 45 (Dec. 15 2012).  This article series concludes with a discussion of topical regulatory issues regarding opening an office in Hong Kong.

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  • From Vol. 4 No.42 (Nov. 23, 2011)

    Speakers at Walkers Fundamentals Hedge Fund Seminar Provide Update on Hedge Fund Terms, Governance Issues and Regulatory Developments Impacting Offshore Hedge Funds

    On November 8, 2011, international law firm Walkers Global (Walkers) held its Walkers Fundamentals Hedge Fund Seminar in New York City.  Speakers at this event addressed various topics of current relevance to the hedge fund industry, including: recent trends in offshore hedge fund structures; hedge fund fees and fee negotiations; fund lock-ups; fund-level and investor-level gates; fund wind-down petitions and the appointment of fund liquidators; corporate governance issues; D&O insurance; fund manager concerns with Form PF; and offshore regulatory developments, such as proposed legislation requiring registration of certain master funds in the Cayman Islands, the EU’s Alternative Investment Fund Manager (AIFM) Directive and the British Virgin Islands (BVI) Securities & Investment Business Act (SIBA).  This article summarizes the key points discussed at the conference relating to each of the foregoing topics and others.

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  • From Vol. 4 No.27 (Aug. 12, 2011)

    SEBI Proposes to Regulate Indian Hedge Funds

    On August 1, 2011, the Securities and Exchange Board of India (SEBI) proposed a comprehensive set of draft regulations for all types of Alternative Investment Funds (AIFs), including private equity, venture capital, private investment in public equity, real estate and strategy funds (which includes hedge funds).  SEBI published the “Concept Paper on Proposed Alternative Investment Funds Regulation” in response to gaps in India’s regulatory regime and the concomitant risks to its markets.  The proposals aim to deter unfair trade practices and mitigate conflicts of interest via regulations mandating registration, imposing disclosure requirements, and setting limits on targeted investors, fund size, fund tenure, and fund strategies, including the extent of leverage and use (without investor consent) of complex structured products.  The resulting regulations, termed “SEBI (AIF) Regulations of 2011,” overhaul the regulatory regime currently in place, which had allowed funds, including hedge funds, to conduct business effectively without oversight.  See “Working Paper Analyzes India’s Approach to Hedge Fund Regulation,” The Hedge Fund Law Report, Vol. 1, No. 14 (Jun. 19, 2008).  This article details the background of the regulatory environment that resulted in this concept paper, and the proposed regulations as they pertain to hedge funds.  For a discussion of a jurisdiction in which hedge fund managers commonly organize entities to access Indian opportunities, see “Hedging into Africa through Cayman and Mauritius,” The Hedge Fund Law Report, Vol. 4, No. 7 (Feb. 25, 2011).

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  • From Vol. 4 No.24 (Jul. 14, 2011)

    Will Hedge Fund Managers That Do Not Have To Register with the SEC until March 30, 2012 Nonetheless Have To Register in New York, Connecticut, California or Other States by July 21, 2011?

    Historically, many hedge fund managers have avoided registering with the SEC as investment advisers in reliance on Section 203(b)(3) of the Investment Advisers Act of 1940, as amended (Advisers Act).  That section – often referred to as the “private adviser exemption” – provided that an investment adviser would not have to register with the SEC if it (1) had fewer than 15 clients in the preceding 12 months, (2) did not hold itself out generally to the public as an investment adviser and (3) did not act as an investment adviser to a registered investment company or business development company.  The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama on July 21, 2010 (Dodd-Frank Act) repealed Section 203(b)(3) of the Advisers Act, effective as of the July 21, 2011 anniversary of the effective date of the Dodd-Frank Act.  However, the Dodd-Frank Act also authorized the SEC to delay (beyond July 21, 2011) the registration deadline for hedge fund managers that (1) previously avoided registration based on the private adviser exemption and (2) were not eligible for another registration exception.  On June 22, 2011, the SEC exercised this authority and delayed until March 30, 2012 the date by which hedge fund managers that are no longer eligible for a federal registration exemption (as of July 21, 2011) will have to register with the SEC.  The majority of hedge fund industry participants greeted the federal registration deadline delay with a sigh of relief (although a vocal minority noted that the delay penalized managers that scrambled to prepare).  However, the federal registration relief created a state registration headache for many hedge fund managers.  Specifically, the investment adviser registration laws or rules of various states effectively incorporate the federal private adviser exemption by reference.  The federal private adviser exemption will be repealed as of July 21, 2011.  Therefore, as of July 21, 2011, states with laws or rules that incorporate the federal private adviser exemption by reference will no longer have effective registration exemptions.  Absent state-level registration deadline delays or other state-level exemptions, hedge fund managers face the prospect of required registration in various states.  What should hedge fund managers do?

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  • From Vol. 4 No.23 (Jul. 8, 2011)

    Recent No-Action Letter Suggests That the SEC Will Not Require Registration by a U.S. “Captive” Investment Advisory Subsidiary of a Foreign Insurance Company

    In a letter dated June 30, 2011, the SEC’s Division of Investment Management (Division) confirmed that it would not recommend enforcement action to the SEC if the wholly-owned U.S. asset management subsidiary of a Japanese insurance company did not register with the SEC as an investment adviser.  For hedge fund managers, there are two potentially interesting aspects of this no-action letter, and one aspect of the no-action letter that limits its application.  The two potentially interesting aspects of the no-action letter are: First, it is one of the few pieces of authority, outside of rule releases, dealing with the real world implications of the elimination of the private adviser exemption by the Dodd-Frank Act.  (This elimination will happen automatically as of July 21, 2011, though the registration due date has been delayed to March 30, 2012.)  Second, at a broad level, it deals with registration questions in the context of global affiliate relationships – an area fraught with ambiguity, and one on which hedge fund industry participants are eager for more SEC guidance.  See “Impact of the Foreign Private Adviser Exemption and the Private Fund Adviser Exemption on the U.S. Activities of Non-U.S. Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 4, No. 16 (May 13, 2011).  However, unfortunately for those seeking guidance, the SEC did not focus on either of the foregoing two topics in its analysis.  Rather, the primary basis for the SEC’s grant of no-action relief, and the focus of its analysis, was more straightforward and less generalizable.

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  • From Vol. 4 No.21 (Jun. 23, 2011)

    SEC Delays Registration Deadline for Hedge Fund Advisers, and Clarifies the Scope and Limits of Registration Exemptions for Private Fund Advisers, Foreign Private Advisers and Family Offices

    At an open meeting held on June 22, 2011, the Securities and Exchange Commission adopted and amended rules that will directly affect the registration, reporting and disclosure obligations of U.S. and non-U.S. hedge fund managers.  While the texts of most of those rules or rule amendments remain to be published as of this writing, comments by SEC commissioners at the open meeting outlined the general scope of the final rules and amendments.  Of particular relevance to hedge fund managers, the SEC addressed the following topics at the open meeting: delay of registration and reporting deadlines; who may and must register with the SEC and the states based on assets under management; the private fund adviser exemption; the foreign private adviser exemption; continuing relevance of the Unibanco no-action letter for global hedge fund sub-­advisory relationships; filing, recordkeeping and examination obligations of exempt reporting advisers; and the exemption from registration for family offices.  This article offers more detail on the SEC’s statements on each of the foregoing topics at the open meeting.

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  • From Vol. 4 No.18 (Jun. 1, 2011)

    Rothstein Kass Survey Reveals Optimism on the Part of Hedge Fund Managers with Respect to Capital Raising, Talent Mobility, Seeding, Industry Consolidation, and In Other Areas

    Rothstein Kass, the provider of audit, tax, accounting and advisory services to private investment funds and their advisers, recently released the results of a survey of 313 hedge fund managers conducted in January of this year.  The survey provides market color on a wide range of relevant topics, and highlights the differing perceptions among larger and smaller managers.  Topics covered by the survey include: registration; talent mobility; optimism among managers; seeding; hedge fund industry consolidation; where the next investment bubble will develop and when it will pop; leverage and liquidity; capital raising; family offices; technology; the role of consultants; fees; outsourcing; branding and communications; and anticipated areas of regulatory scrutiny.  This article summarizes the salient findings of the survey on the foregoing topics, and elaborates on the survey findings with links to relevant articles published in The Hedge Fund Law Report.

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  • From Vol. 4 No.16 (May 13, 2011)

    Impact of the Foreign Private Adviser Exemption and the Private Fund Adviser Exemption on the U.S. Activities of Non-U.S. Hedge Fund Managers

    Passage of the Dodd-Frank Act and relevant SEC rulemaking has changed the regulatory landscape for non-U.S. hedge fund managers that have or plan to establish an advisory presence in the U.S. or that have or plan to target U.S. investors.  Generally – and despite references to “international comity” in one of the relevant proposed rule releases – the Dodd-Frank Act has increased the regulatory burden on non-U.S. hedge fund managers wishing to access the U.S. market.  Or, put another way, Dodd-Frank has narrowed considerably the range of conduct in which non-U.S. managers may engage without getting caught in the purview of U.S. investment adviser registration, or many of its substantive burdens.  This article provides detailed synopses of the relevant provisions of the foreign private adviser exemption and the private fund adviser exemption, focusing in particular on: rules relating to counting clients and investors; measuring “regulatory assets under management”; definitions of “place of business,” “in the United States” and other relevant terms; and recordkeeping and reporting obligations and examination exposure of “exempt reporting advisers.”  This article concludes by discussing how the exemptions may impact U.S. activities typically engaged in by non-U.S. hedge fund managers, such as marketing to U.S. tax-exempt entities and sourcing U.S. investment opportunities.

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  • From Vol. 4 No.16 (May 13, 2011)

    Two Recent Statements from SEC Chairman Mary Schapiro Suggest That Hedge Fund Adviser Registration and Compliance Date Will Be Extended Until the First Quarter of 2012

    In a letter dated April 8, 2011 to the President of the North American Securities Administrators Association, Robert Plaze, Associate Director of the SEC’s Division of Investment Management (Division), indicated that the Division expects “that the Commission will consider extending the date by which [covered hedge fund advisers] must register and come into compliance with the obligations of a registered adviser until the first quarter of 2012.”  See “SEC Anticipates Extension of Compliance Dates for Hedge Fund Adviser Registration and Mid-Sized Adviser Deregistration,” The Hedge Fund Law Report, Vol. 4, No. 12 (Apr. 11, 2011).  While the Plaze letter did not constitute formal SEC action, two recent statements from SEC Chairman Mary Schapiro indicate an increased likelihood of formal action delaying the date by which hedge fund advisers must register and comply with the obligations of registered investment advisers.

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  • From Vol. 4 No.13 (Apr. 21, 2011)

    For Registered Hedge Fund Managers, Inadequate Drafting or Enforcement of Privacy Policies and Procedures May Violate Regulation S-P, Even Absent Harm to Investors

    Section 403 of the Dodd-Frank Act will repeal, as of July 21, 2011, the private adviser exemption in Section 203(b)(3) of the Advisers Act.  Thus, under the Advisers Act and the proposed rules thereunder with respect to registration, (1) hedge fund advisers with at least $150 million in AUM in the U.S. that manage solely private funds and (2) hedge fund managers with AUM in the U.S. between $100 million and $150 million that manage at least one private fund and at least one other type of investment vehicle will have to register with the SEC.  The compliance date for hedge fund adviser registration currently is July 21, 2011.  However, in a letter dated April 8, 2011, Robert Plaze, Associate Director of the SEC’s Division of Investment Management, indicated that the SEC may extend the registration compliance date until the first quarter of 2012.  See “SEC Anticipates Extension of Compliance Dates for Hedge Fund Adviser Registration and Mid-Sized Adviser Deregistration,” The Hedge Fund Law Report, Vol. 4, No. 12 (Apr. 11, 2011).  As registered investment advisers, formerly unregistered hedge fund managers will face a range of new regulatory obligations.  Among other things, registered hedge fund managers will be subject to examination by the SEC – or by FINRA, depending on how regulatory turf wars play out – and will be required to complete Form ADV, file Part 1A of Form ADV and file the brochure(s) required by Part 2A of Form ADV electronically with the Investment Adviser Registration Depository.  On examinations, see Part 1, Part 2 and Part 3 of our three-part series on what hedge fund managers need to know to prepare for, handle and survive SEC examinations.  On Form ADV, see “Application of Brochure Delivery and Public Filing Requirements of New Form ADV to Offshore and Domestic Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 4, No. 11 (Apr. 1, 2011).  In addition, registered hedge fund managers will have to comply with certain provisions of Regulation S-P, the SEC rule governing privacy of consumer financial information.  Many of the provisions of Regulation S-P are substantially similar to Federal Trade Commission privacy rules that, even before Dodd-Frank, applied to unregistered hedge fund managers.  Also, as a practical matter, even unregistered hedge fund managers have in many cases operated as if they were registered (including with respect to privacy of investor information) in order to accommodate the infrastructure demands of institutional investors.  However, the direct application of Regulation S-P to registered hedge fund advisers will constitute a regulatory change, and will require managers to revisit and revise (even if marginally) their privacy policies and procedures.  As hedge fund managers undertake such a revision process, they would do well to keep in mind a recent settlement order in an SEC administrative proceeding against the former chief compliance officer of a defunct broker-dealer.  This article discusses the legal context of the order, summarizes the factual and legal findings in the order and highlights the more notable privacy points for hedge fund managers.

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  • From Vol. 4 No.12 (Apr. 11, 2011)

    SEC Anticipates Extension of Compliance Dates for Hedge Fund Adviser Registration and Mid-Sized Adviser Deregistration

    In a letter dated April 8, 2011 to the President of the North American Securities Administrators Association, Robert Plaze, Associate Director of the SEC’s Division of Investment Management (Division), indicated that the SEC “will consider providing additional time” for hedge fund managers affected by two key registration provisions to comply with those provisions.  The letter does not constitute formal SEC action and the conservative course for hedge fund managers is to proceed with preparations for relevant registration requirements until the SEC issues formal guidance.  However, the letter appears to indicate a recognition on the part of the Division that the increasingly imminent July 21, 2011 compliance date threatens to yield unintended consequences for hedge fund managers and investors, and the SEC itself.

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  • From Vol. 4 No.8 (Mar. 4, 2011)

    Redomiciling Offshore Investment Funds to Ireland, the European Gateway

    Alternative investment managers have increasingly chosen to domicile their funds in European jurisdictions in recent years rather than the Caribbean islands which have traditionally been the home domiciles for hedge funds.  Ireland has been a particularly significant beneficiary of this trend and the percentage of global hedge fund assets domiciled in Ireland has more than doubled over the last 18 months alone so that it now exceeds that of both Bermuda and the BVI.   Furthermore, recent industry statistics showed that 63 percent of European hedge funds were domiciled in Ireland, and this position as the dominant jurisdiction in Europe is continuing to grow.  In a guest article, Mark Browne, a Partner in the Financial Services Department of Mason Hayes+Curran, explores the key drivers behind the movement of offshore funds to Ireland and details the practical steps involved where an asset manager decides to redomicile an existing fund to that jurisdiction.

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  • From Vol. 4 No.7 (Feb. 25, 2011)

    Who Should Newly Registered Hedge Fund Managers Designate as the Chief Compliance Officer and How Much Are Chief Compliance Officers Paid?

    The Dodd-Frank Act (Dodd-Frank) will require hedge fund managers to appoint a chief compliance officer (CCO) for two reasons – an explicit reason and an implicit reason.  Explicitly, Dodd-Frank will require registration (by July 21, 2011) by hedge fund managers with assets under management in the U.S.: (1) of at least $150 million that manage solely private funds; or (2) between $100 million and $150 million that manage at least one private fund and at least one other type of investment vehicle (for example, a managed account).  Registered hedge fund managers will be subject to SEC Rule 206(4)-7, which requires, among other things, registered investment advisers to “designate” (note: not “hire”) a CCO to administer their compliance policies and procedures.  Implicitly, Dodd-Frank is not only the cause of major regulatory change, but also the effect of a changed regulatory mindset.  Post-Dodd-Frank, there is more regulation – considerably more – and more vigorous enforcement of new and existing regulation.  Much of that regulation applies with equal force to registered and unregistered hedge fund managers.  Most notably, insider trading and anti-fraud rules apply to hedge fund managers regardless of their registration status.  See “How Can Hedge Fund Managers Avoid Insider Trading Violations When Using Expert Networks?  (Part One of Three),” The Hedge Fund Law Report, Vol. 4, No. 5 (Feb. 10, 2011).  Recognizing this, even hedge fund managers beneath the relevant AUM thresholds are considering the appointment of a CCO (if they do not already have one).  For hedge fund managers considering the appointment of a CCO – and even for managers that currently have a CCO but are reevaluating how they staff the role – there are three basic approaches: (1) hire a new internal person to serve exclusively as CCO; (2) add the CCO title and duties to the existing portfolio of a current internal person, such as the general counsel (GC), chief operating officer (COO) or chief financial officer (CFO); or (3) outsource the role to a third-party compliance consulting or similar firm.  Which of these approaches makes sense, individually or in combination, depends on the size, strategy, complexity, resources, history and culture of the management company, among other factors.  In short, deciding who to designate as your CCO is a complex decision, and an increasingly important one.  The CCO is often the last bastion before a major compliance or operational failure, and as recent events demonstrate, those sorts of failures typically pose more franchise risk than bad investment calls.  See “Can the Chief Compliance Officer of a Hedge Fund Manager be Terminated for Investigating a Potential Compliance Violation by the Manager's Principal, CEO or CIO?,” The Hedge Fund Law Report, Vol. 4, No. 2 (Jan. 14, 2011).  The basic purpose of this article is to identify the pros and cons of each of the three foregoing approaches to designating a CCO.  To do so, this article discusses: what Rule 206(4)-7 specifically requires and does not require; the relative benefits and burdens of hiring a dedicated CCO, assigning the role to an existing person and outsourcing the role; hybrid approaches that incorporate the best elements of outsourcing and internal work; counterintuitive insights with respect to the demand for compliance professionals in the current environment; and – perhaps most importantly to anyone in, considering or hiring for a CCO role – specific compensation numbers for compliance professionals at hedge fund managers, employees at hedge fund managers who add a CCO role to other roles and dedicated CCOs, and the “market” for fees payable to outsourced CCO firms.  (We thank David Claypoole, Founder and President of Parks Legal Placement LLC, for providing this detailed insight on CCO compensation numbers.)

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  • From Vol. 4 No.5 (Feb. 10, 2011)

    CFTC Proposes New Reporting and Compliance Obligations for Commodity Pool Operators and Commodity Trading Advisers and Jointly Proposes with the SEC Reporting Requirements for Dually-Registered CPO and CTA Investment Advisers to Private Funds

    On January 26, 2011, the U.S. Commodity Futures Trading Commission (CFTC) proposed amendments to Part 4 of its regulations promulgated under the Commodity Exchange Act (CEA) governing Commodity Pool Operators (CPOs) and Commodity Trading Advisers (CTAs).  The CFTC announced a joint effort with the U.S. Securities and Exchange Commission (SEC) proposing the adoption of a new rule on reporting for investment advisers required to register with the SEC that advise one or more private funds and that are also CPOs or CTAs required to register with the CFTC (dual registrants).  This joint endeavor, mandated by Section 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), would obligate dual registrants to file newly-created Form PF with the SEC in order to satisfy both Commissions’ filing requirements.  In an effort to harmonize its rules with this regulatory scheme, the CFTC separately announced a proposed amendment requiring all registered CPOs and CTAs to electronically file newly-created Forms CPO-PQR and CTA-PR with the National Futures Association (NFA) pursuant to § 4.27 of the CFTC regulations, forms substantively identical to Form PF.  The CFTC has also proposed further changes to its regulations that it deemed necessary in the wake of recent economic turmoil and the new regulatory environment engendered by the Dodd-Frank Act.  These proposed amendments would: (1) rescind the exemption from registration for CPOs provided in §§ 4.13(a)(3) and (a)(4) of its regulations; (2) revise § 4.7 so that CPOs may no longer claim an exemption from certifying certain annual reports; (3) incorporate the definition of “accredited investor” promulgated by the SEC in Regulation D into § 4.7; (4) reinstate the criteria for claiming an exclusion from the definition of CPO provided in § 4.5; (5) require any CPO or CTA seeking exemptive relief pursuant to §§ 4.5, 4.13 and 4.14 to annually renew their request with the NFA; and (6) require an additional risk disclosure statement under §§ 4.24 and 4.34 for any CPO or CTA engaged in swap transaction.  The CFTC intends to promulgate these new rules in an effort to provide effective oversight of the commodity futures and derivatives markets and to manage the risks, especially systemic risks, posed by any pooled investment vehicles under its jurisdiction.  This article provides a detailed summary of the CFTC’s proposed amendments.

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  • From Vol. 3 No.44 (Nov. 12, 2010)

    Municipal Securities Rulemaking Board Extends Its Regulatory Reach to Include Hedge Fund Placement Agents

    On November 1, 2010, the Municipal Securities Rulemaking Board (MSRB) filed proposed rule changes with the Securities and Exchange Commission (SEC).  See “Third-Party Marketers that Solicit Public Pension Fund Investments on Behalf of Hedge Funds May Have to Register with the SEC within Three Weeks,” The Hedge Fund Law Report, Vol. 3, No. 35 (Sep. 10, 2010).  Those proposed rule changes are of interest to the hedge fund community for five primary reasons.  First, they clarify the definition of a “municipal advisor” for purposes of Section 975 of Dodd-Frank.  That definition likely encompasses placement agents providing services to hedge funds and other entities that provide similar services to hedge funds but call themselves something else (such as “finders,” “solicitors” or “cash solicitors”).  Second, the proposed rule changes impose three procedural requirements on municipal advisors.  Third, they impose two substantive requirements on municipal advisors.  Fourth, the MSRB’s Notice 2010-47 (Notice), announcing the filing of the proposed rule changes, includes a roadmap of the MSRB’s rulemaking agenda for “the coming months and years,” including rules that will directly affect hedge fund placement agents.  Fifth, the Notice contains a portentous endnote relating to the “federal fiduciary duty” of municipal advisors, and the entities to whom that duty is owed.  This article discusses each of these five points – and identifies the questions that placement agents have to ask and answer today based on these points.

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  • From Vol. 3 No.39 (Oct. 8, 2010)

    Does Dodd-Frank Enable Certain Hedge Fund Managers to Elect Between Registration with the SEC and CFTC?

    The working consensus in the hedge fund industry appears to be that Dodd-Frank will materially expand the range of hedge fund managers required to register with the SEC as investment advisers.  A less-frequently told story, if it has been told at all, is that the plain language of Dodd-Frank may, subject to rulemaking, enable certain hedge fund managers to elect between registration with the SEC and CFTC – a sort of regulatory franchise previously reserved for banking institutions.  Put slightly differently, Dodd-Frank may contain an expansive but as yet under-examined exemption from SEC registration for certain hedge fund managers – an exemption, moreover, that is not based on assets under management.  That exemption – if indeed it is one – is contained in Section 403 of Dodd-Frank.  Here’s how it would work.

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  • From Vol. 3 No.36 (Sep. 17, 2010)

    Three Significant Legal Pitfalls for Hedge Fund Marketers, and How to Avoid Them

    Until recently, the generally held perception was that the worst a hedge fund marketer could do is fail to raise money.  But then came the credit crisis, a raft of new regulations, a newly enlarged and invigorated SEC and a tectonic shift in the hedge fund investor base in favor of more public and private pension funds and other retirement plans.  In this fraught new operating environment, hedge fund marketers can do more than fail to benefit the fund: they can affirmatively harm the fund and manager.  In particular, marketers can, in different contexts: jeopardize fees; render ideal investors off-limits; subject a manager to complex regulatory schemes from which the manager would otherwise be exempt; and give investors the right to rescind their investments.  This article details three significant legal pitfalls that can give rise to these and other harms, and suggests ways to avoid them.

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  • From Vol. 3 No.35 (Sep. 10, 2010)

    What Is the “Market” for Fees and Other Key Terms in Agreements between Hedge Fund Managers and Placement Agents?

    Historically, hedge fund managers have retained placement agents and other third-party intermediaries to identify investors, obtain investments and for related purposes.  Hedge fund managers’ use of placement agents is likely to continue and even increase for two simple reasons: because such use is permitted, and because it can add value.  On the first point, the fact that hedge fund managers can use placement agents is only news because between August 2009 and June 2010, the continued viability of that use was in doubt.  In short, in August 2009, the SEC proposed a pay to play rule that would have prohibited hedge fund managers from using placement agents (or “third-party solicitors,” “solicitors,” “finders” or “pension consultants”) to obtain investments from public pension funds.  Given the importance of public pension funds in the hedge fund investor base – according to Preqin, public pension funds comprise approximately 17 percent of all institutional hedge fund investors – many in the hedge fund industry thought that the proposed ban marked the beginning of the end of the use by hedge fund managers of placement agents.  See, e.g., “The Four P’s of Marketing by Hedge Fund Managers to Pension Fund Managers in the Post-Placement Agent Era: Philosophy, Process, People and Performance,” The Hedge Fund Law Report, Vol. 2, No. 45 (Nov. 11, 2009).  However, the final pay to play rule, adopted by the SEC on June 30, 2010, did not prohibit hedge fund managers from using placement agents to solicit investments from public pension funds, but rather permitted such use so long as the relevant placement agent is a registered investment adviser or registered broker-dealer.  See “How Should Hedge Fund Managers Revise Their Compliance Policies and Procedures and Marketing Practices in Light of the SEC’s New ‘Pay to Play’ Rule?,” The Hedge Fund Law Report, Vol. 3, No. 30 (Jul. 30, 2010).  Along similar lines, on September 2, 2010, the SEC adopted a temporary rule (Rule 15Ba2-6T under the Securities Exchange Act of 1934) requiring municipal advisors to register with the SEC by October 1, 2010 (i.e., within three weeks).  This rule does not prohibit the use by hedge fund managers of “finders,” “solicitors” or other previously unregistered entities to obtain investments from public pension funds, but it may require such entities to register with the SEC.  See “Third-Party Marketers that Solicit Public Pension Fund Investments on Behalf of Hedge Funds May Have to Register with the SEC within Three Weeks,” below, in this issue of The Hedge Fund Law Report.  In short, while the legal and regulatory environment for placement agents has become more complex, their activities are, in general, still legally permitted.  And on the second point – the idea that placement agents can add value – there are two categories of rationales for this idea: micro rationales and macro rationales.  The micro rationales – the specific categories of services that placement agents are well-positioned to provide to hedge fund managers – are detailed below.  As for the macro rationales, four trends suggest that placement agents will play an increasingly important role in the allocation of capital to hedge funds.  First, a disproportionate volume of recent inflows have gone to larger managers.  Second, according to Preqin, 29 percent of institutional investors plan to invest more capital in hedge funds over the next 12 months than they did during the previous 12 months, and 46 percent of investors plan to increase their hedge fund allocations in the next three to five years.  Third, according to Preqin, 37 percent of institutional investors plan to direct any hedge fund allocations in the short to medium term to a mixture of new and existing managers, and 23 percent of institutional investors plan to invest in new managers only (that is, new to the investor, though not necessarily new to the market, i.e., not necessarily startup managers).  Fourth, according to Preqin, “firm reputation” is tied with “track record” as the second most important factor for institutional investors when making hedge fund allocations.  The point: capital is likely to flow into hedge funds over the next five years, but if you are anything other than a large, established manager, the competition for capital is likely to remain fierce.  And importantly in an industry where performance is easily measured, readily comparable and frequently updated, even “large, established managers” can stumble in terms of size and stature, and find themselves pounding the proverbial fundraising pavement once again.  In light of the anticipated importance of placement agents in steering capital into hedge funds over the next (at least) five years, this article seeks to shed light on a relatively obscure topic: the “market” for fees and other terms in agreements between hedge fund managers and placement agents.  Specifically, this article first identifies seven distinct reasons why a manager may hire a placement agent, then details the most important terms of, and issues in connection with, placement agent agreements, including the following: fee structures and levels; declining fees; duration of engagements and sunset provisions; carve-outs for the manager’s pre-existing relationships; exclusivity; licensing, registration and representations with respect to both; indemnification; insurance; and the pay to play overlay.

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  • From Vol. 3 No.33 (Aug. 20, 2010)

    Consequences for Global Hedge Fund Managers of the “Foreign Private Adviser” Exemption Included in the Dodd-Frank Act

    The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank or the Act), enacted on July 21, 2010, contains a general rule with respect to private fund adviser registration, and exemptions from that rule.  The general rule is that private fund advisers, such as hedge fund advisers, must register as investment advisers with the U.S. Securities and Exchange Commission (SEC).  The exemptions from that rule provide that certain categories of private fund advisers are not required to register.  Exempted advisers include those that act as advisers solely to venture capital funds or small business investment companies, family offices, private fund managers with less than $150 million in assets under management (AUM) in the U.S. and so-called “foreign private advisers.”  However, although styled a “limited exemption,” the narrowness of the foreign private adviser exemption may expand the range of non-U.S. hedge fund managers required to register with the SEC and broaden the SEC’s regulatory jurisdiction.  This article examines in detail the foreign private adviser exemption and its implications for global hedge fund managers.  In particular, this article: reviews the definition of “foreign private adviser” under Dodd-Frank; offers practitioner insight on how certain of the key concepts in the definition have historically been understood and are likely to be construed by the SEC; discusses the interaction between the foreign private adviser exemption and the exemption for private fund managers with less than $150 million in AUM; analyzes past SEC practice and precedent with respect to global sub-adviser and affiliate arrangements, including a discussion of a key no-action letter; discusses the SEC’s “registration lite” regime for non-U.S. managers of offshore funds with U.S. investors, as explained by the agency in the release accompanying the subsequently-vacated 2004 hedge fund adviser registration rule; explains the three ways in which non-U.S. hedge fund managers that are not eligible for the foreign private adviser exemption may nonetheless avoid registration; identifies the consequences to non-U.S. hedge fund managers who are not eligible for the foreign private adviser exemption and who nonetheless elect to remain in the U.S. market; and concludes with a discussion of the possibility that the narrowness of the foreign private adviser exemption may engender retaliatory protectionist moves by the European Union on hedge fund regulation, or at least may undermine the credibility of any U.S. objections to protectionist provisions in the EU’s Alternative Investment Fund Manager Directive.

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  • From Vol. 3 No.30 (Jul. 30, 2010)

    Connecticut Welcomes You!  Federal Financial Regulatory Reform Restores Connecticut’s Authority over Hedge Fund Advisers

    The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203) (the "Dodd-Frank Act") changes the federal framework for regulating investment advisers by amending provisions of the Investment Advisers Act of 1940, as amended (the "Advisers Act") regarding state and federal responsibilities and SEC investment adviser registration requirements.  These changes not only impact the scope of the federal regulation of investment advisers by the Securities and Exchange Commission ("SEC"), but also restore, in part, Connecticut's regulatory authority and enforcement responsibilities with respect to investment advisers previously preempted by the National Securities Markets Improvement Act of 1996 ("NSMIA").  More than 4,000 investment advisers are expected to land within the purview of state securities regulators when the Dodd-Frank Act amendments to the Advisers Act become effective on July 21, 2011.  The Securities Division of the Connecticut Department of Banking (the "Securities Division") is well-known in the securities industry for its aggressive approach to securities enforcement.  With a newly appointed U.S. Attorney whose first announcement was that he is creating a securities fraud task force focused on the financial services industry, it is clear that the stakes are going up significantly for private fund managers and other investment advisers with offices in Connecticut – as well as those out of state fund managers and other investment advisers with Connecticut clients.  Those advisers who have been able to escape the reach of the Securities Division, because they are either registered with the SEC or relying on a soon-to-be-lost exemption from SEC registration, must consider the application of Connecticut law to their advisory businesses.  Significantly, Connecticut, unlike most states, requires registration of investment advisers who have a place of business in Connecticut regardless of the number of Connecticut clients, as well as out-of-state investment advisers with more than five clients who are Connecticut residents.  For those investment advisers who would not otherwise land within the reach of the Securities Division, Connecticut Governor Jodi Rell is rolling out the red carpet in the hope of making Connecticut the haven for New York investment advisers looking to escape the proposed increase to the New York state non-resident income tax proposed by New York Governor David Patterson.  With so many variables now at play as a result of the passage of the Dodd-Frank Act, Genna N. Garver, an Associate at Bracewell & Giuliani LLP, and John A. Brunjes and Cheri L. Hoff, both Partners at Bracewell & Giuliani LLP, take this opportunity to survey, in a guest article, the changing federal framework and the interplay of these requirements with the current Connecticut investment adviser regulatory scheme.

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  • From Vol. 3 No.19 (May 14, 2010)

    Singapore Monetary Authority Proposes New Rules to License Larger Hedge Fund Management Firms

    On April 27, 2010, the Monetary Authority of Singapore (Authority), the Singapore central bank, set out its new plan to regulate fund managers, including hedge fund managers, with a framework governing fund management companies (FMCs).  Currently, Singapore represents the only developed jurisdiction other than the United States where hedge funds do not face regulation so long as they deal only with “accredited” or professional investors.  Pursuant to the Singapore Securities and Futures Act (SFA), in order to conduct fund management activities in Singapore, managers must either hold a Capital Markets Services (CMS) license, or fit within an exemption from the need to hold such a license.  Hedge fund managers in Singapore currently receive an exemption from holding a CMS license provided that they manage funds on behalf of 30 or fewer “qualified” investors (“qualified” investors refer to accredited investors, or funds whose underlying investors are all “accredited” investors).  The SFA refers to these managers as exempt fund managers (EFMs).  The new framework proposes the creation of three new categories of FMCs: (1) a “notified” category for smaller companies that manage fewer than S$250million (US$183 million) and serve no more than 30 qualified investors with no more than 15 funds; (2) a “licensed” category for those with assets under management (AUM) greater than S$250 million who serve only “accredited” and institutional investors; and (3) a “licensed” category for those who manage retail (non-accredited and non-institutional) investors.  Significantly, then, hedge fund management firms in Singapore that manage more than S$250 million and those that serve retail investors (the second and third categories) will require licenses.  These changes may potentially have a significant impact on many hedge fund managers who have established funds in Singapore in the last few years due to its light regulation.  Singapore now has 138 single-strategy hedge fund managers employing more than 800 professionals, according to a survey by the local chapter of the Alternative Investment Management Association (AIMA).  According to a survey by AIMA, this industry oversees at least $34.9 billion in assets under management, excluding assets managed by several of the large global firms, making it Asia’s second biggest market.  This article summarizes the proposed revisions to the Singapore regulatory regime, the proposed admission criteria for participation in the regime, the implications of the revisions for hedge fund managers in Singapore and the reaction from the AIMA.

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  • From Vol. 3 No.16 (Apr. 23, 2010)

    Impact of Regulatory Reforms on Hedge Funds is Key Focus of PLI’s Hedge Fund Registration and Compliance 2010 Seminar

    As the government and the Securities and Exchange Commission (SEC) push for a number of reforms in the financial markets, the impact on hedge funds is expected to be significant, particularly with the Private Fund Investment Advisers Registration Act of 2009 (House bill) and the Wall Street Reform and Consumer Protection Act of 2009 (Dodd bill) both calling for the mandatory registration of hedge fund managers who meet certain assets under management (AUM) thresholds.  On April 9, 2010, the Practising Law Institute hosted the Hedge Fund Registration and Compliance 2010 seminar in New York City.  Among the key topics discussed during the conference were: fund manager registration; likely changes to the definition of accredited investor; proposed resolution authority; the Volcker Rule; key issues regarding hedge fund marketing; side letters; strategy drift; and soft dollars.  This article offers a comprehensive summary of the key points raised and discussed at the conference.

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  • From Vol. 3 No.15 (Apr. 16, 2010)

    Does the IOSCO Hedge Fund Disclosure Template Foreshadow the Content of Hedge Fund and Hedge Fund Adviser Disclosures to be Required by the SEC?

    On February 25, 2010, the International Organization of Securities Commissions’ (IOSCO) Technical Committee published a global template (IOSCO Template) listing suggested categories of information to be collected from hedge funds and hedge fund managers by national securities regulators.  According to Kathleen Casey, Chairman of the IOSCO Technical Committee and a Commissioner of the U.S. Securities and Exchange Commission (SEC), the IOSCO Template seeks to: (1) enable the collection of comparable data by regulators in different jurisdictions; (2) facilitate sharing of that data among regulators; (3) facilitate monitoring of systemic risk; (4) prevent gaps in regulatory reporting requirements; and (5) inform the legislative processes in jurisdictions considering hedge fund adviser registration bills, such as the U.S.  See “U.S. House of Representatives Holds Hearing on Hedge Fund Adviser Registration,” The Hedge Fund Law Report, Vol. 2, No. 42 (Oct. 21, 2009).  Broadly, the IOSCO Template seeks to effectuate these goals by collecting data in four categories: (1) hedge fund trading activities; (2) the markets in which hedge funds operate; (3) hedge fund credit and funding information; and (4) hedge fund counterparty data.  The IOSCO Template builds on the principles embodied in the IOSCO Technical Committee’s June 2009 report endorsing mandatory registration for hedge fund managers.  See “IOSCO Report Suggests Mandatory Registration for Hedge Fund Managers and Prime Brokers,” The Hedge Fund Law Report, Vol. 2, No. 26 (Jul. 2, 2009).  IOSCO is an international organization whose members include national securities regulators.  Generally, its pronouncements have persuasive, but not legal, force.  See “Will Hedge Fund Industry Self-Regulatory Codes, Such as the ‘Standards’ Promulgated by The Hedge Fund Standards Board, Preempt Additional Hedge Fund Regulation or Complement It?,” The Hedge Fund Law Report, Vol. 2, No. 16 (Apr. 23, 2009). In parallel, on March 15, 2010, Senate Banking Committee Chairman Christopher Dodd (D-CT) released a Chairman’s Mark of the comprehensive financial reform bill (Dodd Bill) that he introduced as a Discussion Draft in November 2009.  A week later, the Senate Banking Committee passed Chairman Dodd’s bill on a party line vote, thereby sending the bill to the Senate floor for debate, and approved a package of technical amendments to the bill.  Notably, the Dodd Bill would rescind the “private adviser exemption” of Section 203(b)(3) of the Investment Advisers Act of 1940, thus requiring most hedge fund managers to register with the SEC as investment advisers.  Also, the Dodd Bill would require hedge fund advisers to maintain, and potentially to file with the SEC, records and reports pertaining to assets under management, leverage, counterparty exposure, other trading and operational matters and “such other information as the SEC determines is necessary and appropriate in the public interest and for the protection of investors or for the assessment of systemic risk.”  Importantly, the Dodd Bill includes provisions requiring the SEC, a to-be-created Financial Stability Oversight Council (FSOC) and any department, agency or self-regulatory organization that receives reports or information from the SEC (which the SEC in turn received from a hedge fund manager) to maintain the confidentiality of those reports and that information.  The IOSCO Template contains no analogous confidentiality provision. In short, the Dodd Bill lists categories of information required to be disclosed by registered hedge fund advisers and delegates considerable rulemaking authority to the SEC to expand those categories or add additional categories.  Generally, the IOSCO Template calls for a broader range of disclosures from hedge fund advisers than the Dodd Bill.  Especially given SEC Commissioner Casey’s role as Chairman of the IOSCO Technical Committee, hedge fund industry participants are wondering whether the SEC will look to the IOSCO Template when proposing rules relating to required disclosures by registered hedge fund advisers.  (This presumes, of course, that the hedge fund adviser registration provision in the Dodd Bill or a similar provision in another bill will become law, and the broad industry consensus is that such a provision will become law.)  Sources interviewed by The Hedge Fund Law Report suggested that SEC-required hedge fund adviser disclosures are likely to include more than what is included in the Dodd Bill but less than what is included in the IOSCO Template.  In an effort to assist hedge fund managers in preparing for an imminent registration requirement, and the concomitant disclosures it may require, this article: provides a chart comparing the categories of disclosure called for by the IOSCO Template and the Dodd Bill, showing precisely what is included in each and where they differ; discusses the confidentiality provisions in the Dodd Bill; and analyzes the potential downsides of such disclosures, as well as the potential upsides of such disclosures.  (Counterintuitive though it may sound, there may be practical benefits associated with the required disclosures.)

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  • From Vol. 3 No.15 (Apr. 16, 2010)

    White & Case Hosts Program on “Financial Regulatory Reform: Current Status and Developments,” Highlighting Key Legislative Proposals Impacting Hedge Fund Managers, Broker-Dealers and Derivatives Industry Participants

    As previously reported in the Hedge Fund Law Report, on March 26, 2009, the U.S. Department of the Treasury outlined a new framework for financial regulatory reform, including a proposal to require advisers to hedge funds (and other private pools of capital) with assets under management above a certain threshold to register with the SEC, along with certain other regulatory reforms.  See “Treasury Calls for Registration of Hedge Fund Managers with Assets Under Management Above a Certain Threshold and Outlines Framework for Other Regulatory Reforms Aimed at Limiting Systemic Risk,” The Hedge Fund Law Report, Vol. 2, No. 13 (Apr. 2, 2009).  Some of these reforms have been incorporated into current and pending legislation, including, most notably, the Private Fund Investment Advisers Registration Act of 2009, which was incorporated into Title V of the Wall Street Reform and Consumer Protection Act of 2009 and was passed by the House of Representatives on December 11, 2009 (House bill), and the Restoring American Financial Stability Act of 2009, which was introduced by Banking Committee Chairman Senator Christopher Dodd on November 10, 2009 (Dodd bill).  For more on the Dodd bill, see “Does the IOSCO Hedge Fund Disclosure Template Foreshadow the Content of Hedge Fund and Hedge Fund Adviser Disclosures to be Required by the SEC?,” above, in this issue of the Hedge Fund Law Report.  Also on March 26, 2009, the Obama Administration issued details on proposed legislation for a “resolution authority” that would give the President sweeping powers to dismantle or reorganize failing companies that pose a threat to the country’s financial system.  On April 8, 2010, White & Case LLP held a seminar entitled “Financial Regulatory Reform: Current Status and Developments,” with the goal of outlining and analyzing some of the more significant pieces of the pending financial regulatory reform legislation referenced above, and the ways in which various market participants may be impacted by such reforms.  This article outlines the most relevant topics discussed at the seminar, including: legislation relating to creation of a “resolution authority” to deal with pending failures of large, interconnected financial companies; ipso facto clauses in derivatives contracts; proposed central clearing requirements for derivatives; comparisons of the relevant provisions of the House and Dodd bills with respect to hedge fund manager registration; the issue of self-custody by hedge fund managers in light of the recent amendments to the custody rule; the proposed fiduciary standard for broker-dealers providing investment advice incidental to their brokerage activities; and the treatment of proprietary trading activities of broker-dealers under the Volcker Rule.

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  • From Vol. 2 No.50 (Dec. 17, 2009)

    Regulatory Compliance Association Hosts Program on Increased Risk for Hedge Fund Directors and Officers in the New Era of Heightened Regulation and Enforcement

    On December 9, 2009, The Regulatory Compliance Association (RCA) hosted a teleconference titled “Director and Officer Liability Escalate in the New Era of Heightened Regulation,” as part of its CCO University Outreach Series.  Walter Zebrowski, CIO and COO for Hedgemony Partners and Chairman of the RCA, explained in his introductory remarks that the “aftermath of the financial collapse coupled with the new era of heightened regulation shall significantly intensify the scrutiny and liability for directors and officers.”  The event was moderated by Richard Maloy, CIC, CRM, Chairman and CEO of Maloy Risk Services.  The panelists included Peter Welsh, a Partner at Ropes & Gray LLP; Ingrid Pierce, a Partner at Walkers Global; and Michael Pereira, Publisher of The Hedge Fund Law Report.  The panelists discussed issues including: the increased effectiveness on the part of regulators, especially the SEC; pending legislation relating to registration of hedge fund managers, and the practical burdens that registration would (and would not) entail; liquidity and regulation of the insurance industry; demands from institutional investors and insurance underwriters for transparency from hedge funds and managers; the role of independent directors; claims trends, including insider trading (and 12 specific strategies that may be used to avoid insider trading allegations); the institutionalization of the hedge fund industry; and the changing directors and officers (D&O) insurance landscape.  This article summarizes the speakers’ insights on the foregoing issues, and highlights the salient points raised by the speakers on related topics.

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  • From Vol. 2 No.49 (Dec. 10, 2009)

    Stars in Transition: A New Generation of Private Fund Managers

    The economic events of 2008 and 2009 resulted in significant displacement of star talent from market-leading investment banks and similar financial institutions, some of which have ceased to exist.  Some of those stars have moved on to their own ventures, and are launching their own investment management firms to raise hedge or private equity funds.  For most of their careers, some of these individuals, or entire teams of talent, may have thrived in larger institutional environments; however, now many are facing new challenges with practical issues they never had to address, or be bothered with, in the past.  Basic questions can range from something as fundamental and potentially complicated as “do I need to register with the SEC and what rules apply to me?” to something much more basic like “are the terms of this office lease a good deal for me?”  Any manager starting a hedge fund or private equity fund advisory business, whether an experienced veteran or first-timer, will need to think about many issues that could be broadly grouped within the following five categories: (1) seed investors/compensation arrangements; (2) registration requirements for the investment manager and its funds; (3) other regulatory issues impacting private funds; (4) the fund’s offering and operating documents; and (5) the investment manager’s business operations and service providers.  In a guest article, Ira P. Kustin, a Partner in the investment funds practice group at Akin Gump Strauss Hauer & Feld LLP, details the relevant considerations for start-up managers in each of these five categories.

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  • From Vol. 2 No.47 (Nov. 25, 2009)

    How Will Registration and Reporting Impact Hedge Fund Managers? An Interview with Todd Groome, Non-Executive Chairman of the Alternative Investment Management Association (Part 2)

    On November 3, 2009, the Alternative Investment Management Association (AIMA) reiterated its support for the registration of hedge fund managers operating in the U.S. and for the reporting of systemically relevant information by larger managers to national authorities in the interest of financial stability.  The following day, the Financial Services Committee of the U.S. House of Representatives, by a vote of 41 to 28, approved a bill that would impose a registration mandate, The Private Fund Investment Advisers Act of 2009, sponsored by Rep. Paul Kanjorski (D-PA).  See “U.S. House of Representatives Holds Hearings on Hedge Fund Adviser Registration,” The Hedge Fund Law Report, Vol. 2, No. 42 (Oct. 21, 2009); “House Subcommittee Considers Bill Requiring U.S. Hedge Fund Advisers with Over $30 Million in Assets Under Management to Register with SEC,” The Hedge Fund Law Report, Vol. 2, No. 41 (Oct. 15, 2009).  The Hedge Fund Law Report recently interviewed Todd Groome, who since December 2008 has served as Non-Executive Chairman of the AIMA.  (Before assuming his current role, Groome was an Advisor in the Monetary and Capital Markets Department of the International Monetary Fund.)  Our interview focused on topics including: the range of appropriate information for financial reports to national authorities; the capacity of administrators to analyze and act on that information; the disproportionate costs of compliance with reporting requirements for smaller managers; the need to preserve the confidentiality of the information (in its pre-aggregated form) that may be reported by managers; the sources of systemic risk and how to mitigate it; the sharing of information among national authorities; the development of an official multi-national information template; the threat of a tax-driven flight of talent and capital from London; sound practices for hedge fund administrators; the continued viability of an in-house administration option; and the policy or politics behind last year’s bans on short selling in the financial services industry in both the U.S. and the U.K.  The first half of the full transcript of that interview appeared in last week’s issue of The Hedge Fund Law Report.  The remainder of the full transcript is included herein.

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  • From Vol. 2 No.46 (Nov. 19, 2009)

    How Will Registration and Reporting Impact Hedge Fund Managers? An Interview with Todd Groome, Non-Executive Chairman of the Alternative Investment Management Association

    On November 3, 2009, the Alternative Investment Management Association (AIMA) reiterated its support for the registration of hedge fund managers operating in the U.S. and for the reporting of systemically relevant information by larger managers to national authorities in the interest of financial stability.  The following day, the Financial Services Committee of the U.S. House of Representatives, by a vote of 41 to 28, approved a bill that would impose a registration mandate, The Private Fund Investment Advisers Act of 2009, sponsored by Rep. Paul Kanjorski (D-PA).  See “U.S. House of Representatives Holds Hearings on Hedge Fund Adviser Registration,” The Hedge Fund Law Report, Vol. 2, No. 42 (Oct. 21, 2009); “House Subcommittee Considers Bill Requiring U.S. Hedge Fund Advisers with Over $30 Million in Assets Under Management to Register with SEC,” The Hedge Fund Law Report, Vol. 2, No. 41 (Oct. 15, 2009).  The Hedge Fund Law Report recently interviewed Todd Groome, who since December 2008 has served as Non-Executive Chairman of the AIMA.  (Before assuming his current role, Groome was an Advisor in the Monetary and Capital Markets Department of the International Monetary Fund (IMF).)  Our interview focused on topics including: the range of appropriate information for financial reports to national authorities; the capacity of administrators to analyze and act on that information; the disproportionate costs of compliance with reporting requirements for smaller managers; the need to preserve the confidentiality of the information (in its pre-aggregated form) that may be reported by managers; the sources of systemic risk and how to mitigate it; the sharing of information among national authorities; the development of an official multi-national information template; the threat of a tax-driven flight of talent and capital from London; sound practices for hedge fund administrators; the continued viability of an in-house administration option; and the policy or politics behind last year’s bans on short selling in the financial services industry in both the U.S. and the U.K.  The first half of the full transcript of that interview is included in this issue of The Hedge Fund Law Report.  The remainder of the full transcript will be included in a subsequent issue.

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  • From Vol. 2 No.42 (Oct. 21, 2009)

    U.S. House of Representatives Holds Hearing on Hedge Fund Adviser Registration

    On October 6, 2009, the U.S. House of Representatives, Financial Services Committee held a hearing on three legislative proposals regarding: (1) investor protection; (2) private fund adviser registration; and (3) insurance information.  The proposals, introduced by Rep. Paul Kanjorski (D-Pa.), Chairman of the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, are aimed at reforming the regulatory structure of the financial services industry and largely mirror proposals released by the Senate and the Obama administration.  See also “House Subcommittee Considers Bill Requiring U.S. Hedge Fund Advisers with Over $30 Million in Assets Under Management to Register with SEC,” The Hedge Fund Law Report, Vol. 2, No. 41 (Oct. 15, 2009).  At the sparsely-attended hearing, regulators and industry advocates largely expressed support for the proposals.  Rep. Spencer Bachus (R-Al.), for example, called private funds, including hedge funds, “a valuable cog in our economy.”  (Notably, however, the hearings took place before charges against Raj Rajaratnam of the Galleon Group were made public.  See “Billionaire Founder of Hedge Fund Manager Galleon Group, Raj Rajaratnam, Charged in Alleged Insider Trading Conspiracy,” above, in this issue of The Hedge Fund Law Report.  While the charges against Rajaratnam and others have more to do with a group of allegedly bad actors, and less to do with hedge funds per se, press reports already have begun to conflate the hedge fund structure with the alleged insider trading.)  Despite the overall productive tone of the hearing, a major question remains: how quickly will Congress move with the proposed hedge fund adviser registration legislation?  This article summarizes the most relevant topics of discussion at the hearing, including commentary from members of Congress on the three bills, and concludes with a discussion of likely timing of legislative action.

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  • From Vol. 2 No.42 (Oct. 21, 2009)

    Hedge Fund Association Hosts Capitol Hill Symposium Focused on Hedge Fund Adviser Registration and Hedge Fund Industry Regulation

    On October 5, 2009, the Hedge Fund Association (HFA) held its third annual Capitol Hill Symposium in Washington, DC.  This year’s symposium addressed many of the regulatory proposals pending before Congress that would affect the global hedge fund industry.  Although there are numerous bills currently pending, the symposium focused on two recent proposals in the House of Representatives: (1) the Investor Protection Act, which would hold broker-dealers that provide investment advice to the same fiduciary duty standard as investment advisers; and (2) the Private Fund Adviser Registration Act, which would require most hedge fund managers to register with the Securities Exchange Commission as investment advisers.  See “U.S. House of Representatives Holds Hearing on Hedge Fund Adviser Registration,” above, in this issue of The Hedge Fund Law Report.  See also “House Subcommittee Considers Bill Requiring U.S. Hedge Fund Advisers with Over $30 Million in Assets Under Management to Register with SEC,” The Hedge Fund Law Report, Vol. 2, No. 41 (Oct. 15, 2009).  Rep. Paul Kanjorski (D-Penn.), the sponsor of the bills, spoke at the symposium, offering his thoughts on the need for and timing of the legislation.  We discuss the more noteworthy ideas raised at the symposium, including: The Hedge Fund Association’s position on hedge fund regulation and the rationale for its position; Rep. Kanjorski’s keynote address; credit ratings reform; international coordination of regulatory efforts; industry reactions to the Investor Protection Act and Private Fund Adviser Registration Act; and the practical risks inherent in increased regulation of the hedge fund industry.

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  • From Vol. 2 No.41 (Oct. 15, 2009)

    House Subcommittee Considers Bill Requiring U.S. Hedge Fund Advisers with Over $30 Million in Assets Under Management to Register with SEC

    On October 1, 2009, in an effort to ensure that “everyone who swims in our capital markets has an annual pool pass,” Representative Paul E. Kanjorski (D-PA) released a “discussion draft” of a bill that would amend the Investment Advisers Act of 1940 (IAA) by requiring advisers to certain unregistered investment companies, including hedge funds, to register with and provide information to the Securities and Exchange Commission (SEC).  The proposed “Private Fund Investment Advisers Registration Act of 2009” (Draft) was released just prior to a House Financial Services Subcommittee on Capital Markets hearing held on October 6, 2009.  The bill generally would require U.S. hedge fund advisers with assets under management collectively across their funds of over $30 million to register with the SEC, even if the adviser has fewer than 15 “clients.”  Kanjorski’s draft essentially mirrors the U.S. Treasury Department’s bill by the same name which was released in July 2009 (Treasury Bill).  See “U.S. Treasury Department Proposes Legislation Requiring Registration of Hedge Fund Advisers,” The Hedge Fund Law Report, Vol. 2, No. 29 (Jul. 23, 2009).  This article analyzes the Draft and the Treasury bill, detailing the mechanics of each and noting how they are similar and different on points such as the collection of systemic risk data, information required to be reported, a registration exemption for venture capital fund advisers and expansion of the SEC’s authority to obtain information on the identity, investments or affairs of any client of a hedge fund adviser.  This article also details industry reactions to the Draft as embodied in testimony by representative of the Managed Funds Association, the Private Equity Council, the Coalition of Private Investment Companies and the National Venture Capital Association at the October 6 hearing before the House Financial Services Subcommittee on Capital Markets.

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  • From Vol. 2 No.41 (Oct. 15, 2009)

    Participants at Third Annual Hedge Fund General Counsel Summit Discuss Adviser Registration, Side Letters, SEC Audits and Enforcement, Fund Restructurings and More

    On October 1, 2009, the Third Annual Hedge Fund General Counsel Summit convened in Old Greenwich, Connecticut, organized by Corporate Counsel and Incisive Media Events.  The one-day conference featured eight panel discussions focusing on topics including the following: changes in the regulatory and enforcement practices of the Securities and Exchange Commission (SEC); the “foregone conclusion” that the U.S. Congress will soon pass a bill requiring the registration of certain hedge fund advisers; how to prepare for an SEC audit; side letter terms and tracking; and hedge fund restructurings in the U.S., Cayman Islands and British Virgin Islands.  A recurring theme among the various panels was the newfound relevance of compliance and robust controls in the hedge fund business, and the concomitant growth in importance within hedge fund managers of the general counsel and chief compliance office (often the same person).  This article discusses the most salient points raised at the conference.

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  • From Vol. 2 No.34 (Aug. 27, 2009)

    Interview with HedgePort Associates’ CEO Andrew Springer on the New Firm’s Operational and Marketing Services for Startup Hedge Fund Managers

    Although the hedge fund industry continues to recover from a year of unprecedented underperformance and record redemptions, and is still reeling from an economic recession, opportunities remain for startup hedge funds.  A new firm, HedgePort Associates, has been established to provide operational, regulatory and marketing services to hedge fund managers as they start and grow their businesses.  Andrew Springer is the founder and CEO of HedgePort Associates; he also founded hedge fund operations consulting firm Resolve Inc.  The Hedge Fund Law Report spoke with Springer about HedgePort and the services the firm provides.  The full transcript of that interview is included in this issue of The Hedge Fund Law Report, and covers topics including: the market for startup hedge funds; whether and how certain operational functions can be outsourced; where liability resides in the event of a compliance violation if compliance functions are outsourced; the difference between track records compiled at hedge funds and on proprietary trading desks; HedgePort’s compensation structure; wind-down services offered by HedgePort; the SEC’s new pay to play rules; structuring matters; and more.

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  • From Vol. 2 No.33 (Aug. 19, 2009)

    New Hedge Fund Transparency and Investors’ Rights – The Times They Are A Changin’

    So far in this century, hedge funds have raised and invested billions with minimal regulation and very little disclosure about their activities.  An investor turns over his money to the fund and goes along for the ride, usually without knowing what investments the fund manager has made, with little understanding of the strategies being employed and without access to information about where the fund is headed.  If an investor becomes dissatisfied, its only remedy is to withdraw from the fund.  Even that has strings attached to it.  Still, total hedge fund assets under management are estimated to have soared from approximately $450 billion in 1999 to over $2.5 trillion in June 2008, according to The Alternative Investment Management Association Limited.  During the fall of 2008, hedge fund returns plummeted, redemption requests poured in and many funds halted redemptions.  Several closed their doors; others sold their assets or have announced plans to do so.  Others are satisfying redemption requests with interests in newly formed pools of illiquid securities.  Add to this the fallout from Bernard Madoff and a few other high-profile hedge fund stories, and the stage is set for revisiting and rethinking the rights of investors in hedge funds.  The change has started even if, for the moment, it is still a trickle rather than a flood.  In a guest article, Robert L. Bodansky and E. Ann Gill, Partners at Seyfarth Shaw LLP, and Laura Zinanni, an Associate at the firm, discuss adopting private equity concepts in the hedge fund business model; advisory committees; charging performance fees only on realized gains; standards of conduct and fiduciary duty; most favored nations clauses and disclosure of side letters; investor reporting; indemnification carve outs; minimum levels of insurance; regulatory proposals in the United States and in Europe; pay to play regulation; due diligence; in-kind distribution issues; and more.

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  • From Vol. 2 No.33 (Aug. 19, 2009)

    Third Circuit Holds that a Commodity “Feeder Fund” Must Register as a Commodity Pool Operator, Even Though the Feeder Fund Itself Does Not Trade in Commodities

    On July 13, 2009, the U.S. Court of Appeals for the Third Circuit affirmed a district court decision holding that Equity Financial Group – a “feeder fund” that invested in underlying funds that traded commodities, but that did not itself trade commodities – along with its president and sole shareholder and lawyer violated the Commodity Exchange Act (CEA) by failing to register as a commodity pool operator (CPO) and engaging in other fraudulent conduct.  The case, which appears to be one of first impression, confirms a view long held by the Commodity Futures Trading Commission (CFTC): that investors in commodity markets are exposed to the same risk whether they invest directly or indirectly, and thus direct and indirect investors are entitled to the same degree of regulatory protection.  See, e.g., “Michigan Couple Ordered to Pay More Than $3.1 Million for ‘Private Hedge Fund’ Fraud,” The Hedge Fund Law Report, Vol. 1, No. 9 (Apr. 29, 2008).  For hedge fund managers, the decision’s impact may be mitigated by various exceptions from CPO registration that may be available to them; those exceptions are discussed more fully below.  However, hedge funds that are required to register and elect not to take advantage of an exception or are not eligible for an exception are well advised to review the obligations that registration as a CPO entails.  These obligations include, among others, disclosure, record keeping and operating requirements.  See “Should Hedge Funds Register as Commodity Pool Operators?,” The Hedge Fund Law Report, Vol. 2, No. 26 (Jul. 2, 2009).  This article details the factual background and legal analysis in the Equity Financial Group case; discusses exclusions and exemptions from CPO registration that generally are available to hedge fund managers; addresses whether managed accounts are a viable means of structuring around the holding in the Equity Financial Group case; and highlights various consequences of CPO registration.

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  • From Vol. 2 No.32 (Aug. 12, 2009)

    Conflicts and Opportunities Offered by Concurrent Management of Employee-Owned Hedge Funds and Outside-Investor Hedge Funds

    When a hedge fund manager manages concurrent funds with different investor bases, investors are reasonably concerned about how investment opportunities that fall within the mandate of both funds may be allocated.  For example, investors in one fund may be concerned that the other fund is “front running” the fund in which they are invested.  On “front running,” see “Hedge Fund Manager Kenneth Pasternak Cleared of Securities Fraud,” The Hedge Fund Law Report, Vol. 1, No. 15 (Jul. 8, 2008).  Even short of that, managers must address concerns about the fair and transparent allocation of investment opportunities and managerial efforts.  As Gregory Nowak, Partner at Pepper Hamilton LLP, told The Hedge Fund Law Report in an interview, investors want to know that managers are “eating their own cooking.”  The potential conflicts inherent in simultaneous management of multiple funds can be especially pronounced when one of the funds is a proprietary fund, owned by employees of the management firm, and another fund includes outside investors.  If the employee-owned fund gains and the outside-investor fund gains less, does not gain at all or loses, there will be questions from the outside investors, as happened earlier this year to Renaissance Technologies.  Renaissance’s Medallion Fund, a hedge fund whose investors consisted of Renaissance principals and employees, gained 12 percent in the first four months of 2009, while Renaissance Institutional Equities Fund, with outside investors, lost 17 percent in the same period.  In a conference call with fund management, the outside investors demanded explanations for the divergent performance – even though the funds had significantly different investment mandates.  Against this backdrop, this article addresses the following questions: how common is the practice of operating an employee-owned fund alongside an outside-investor fund?  What are the benefits of such an arrangement?  Who constitutes a “knowledgeable employee” for purposes of beneficial ownership of an employee-owned fund?  And, what are the drawbacks of such an arrangement, and how can they best be managed?

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  • From Vol. 2 No.31 (Aug. 5, 2009)

    Changing Hedge Fund Landscape Key Focus of Foundation for Accounting Education’s 2009 Hedge Funds and Alternative Investments Conference

    On July 29, 2009, the Foundation for Accounting Education presented the 2009 Hedge Funds and Alternative Investments Conference in New York City.  During the one-day event, industry participants discussed the changing landscape for hedge funds, including new demands from investors and the most recent regulatory developments.  A key theme echoed by the participants was that hedge funds need to be better prepared to deal with the changes that are coming, from registration to new valuation policies to increased examinations, not only by the Securities and Exchange Commission (SEC) but by the Internal Revenue Service (IRS) as well.  We detail the key take-aways from the conference, including a discussion of the erosion of trust among hedge fund managers and investors; pressure on hedge fund fees; likely changes in hedge fund regulation; expanded SEC examinations of hedge fund managers and improvements to the training of the SEC’s hedge fund examination staff; and the new IRS Managed Funds Group.

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  • From Vol. 2 No.29 (Jul. 23, 2009)

    U.S. Treasury Department Proposes Legislation Requiring Registration of Hedge Fund Advisers

    On July 15, 2009, the United States Treasury Department published its proposed Private Fund Investment Advisers Registration Act of 2009 (Act).  The Act reflects proposals contained in the Obama Administration’s recent White Paper on financial reform.  (For more on the White Paper, see “The Obama Administration Outlines Major Financial Rules Overhaul, Announces Greater Scrutiny for Hedge Funds and Derivatives,” The Hedge Fund Law Report, Vol. 2, No. 25 (Jun. 24, 2009)).  If passed, the Act would amend the Investment Advisers Act of 1940 (Advisers Act) and require registration with the SEC of nearly all advisers to hedge funds and other large private investment funds.  The Act would not require the funds to register directly, but their advisers would have to report, albeit confidentially, on the funds they advise.  This article summarizes the Act’s most salient provisions and its implications for the hedge fund community.

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  • From Vol. 2 No.29 (Jul. 23, 2009)

    Andrew Baker, CEO of the Alternative Investment Management Association, Discusses the AIFM Directive, UK Tax, Short Selling and Other Topics with The Hedge Fund Law Report

    Andrew Baker, formerly Chief Operating Officer for Schroder Investment Management, became the Deputy Chief Executive of the Alternative Investment Management Association (AIMA) in August 2007, and the Chief Executive Officer in December 2008.  In those capacities, he has played a key role in shaping the AIMA’s response to recent developments in international hedge fund law and regulation.  On July 17, 2009, The Hedge Fund Law Report spoke to him about current and potential regulatory changes in Europe and the U.S., the tax climate in the UK, “grey” tax havens and laws and proposals that have or would mandate transparency with respect to short positions.  A full transcript of that interview is included in this issue of The Hedge Fund Law Report.

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  • From Vol. 2 No.29 (Jul. 23, 2009)

    Investors’ Working Group Recommends Delayed Disclosure of Holdings to Regulators and Registration of Hedge Fund Advisers

    As the calls for additional regulation of the hedge fund industry continue to mount, the Investors’ Working Group (IWG) has added its recommendations to the growing list of proposals to oversee the industry.  The IWG is an independent task force sponsored by the CFA Institute Centre for Financial Market Integrity and the Council of Institutional Investors.  On July 15, 2009, the IWG issued a report (Report) recommending that investment managers, including managers of hedge funds and private equity funds, be required to make regular disclosures to regulators on a real-time basis to protect against systemic risk.  The IWG also advocated requiring hedge fund managers to register as investment advisers with the SEC, a proposal that has been echoed by various legislators and the U.S. Treasury.  We offer a detailed description of the parts of the Report most relevant to hedge funds, and include industry responses to the Report.

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  • From Vol. 2 No.26 (Jul. 2, 2009)

    Should Hedge Funds Register as Commodity Pool Operators?

    A common mistaken belief among many is that hedge funds are unregistered and unregulated investment vehicles.  While certain exemptions exist under the Investment Company Act of 1940 for registration, a hedge fund that trades in commodity options and futures contracts may be required to register as a commodity pool operator (CPO).  In a guest article, Ernest Edward Badway and Amit Shah, Partner and Associate, respectively, at Fox Rothschild LLP, discuss the questions that a hedge fund should consider in evaluating whether to register as a CPO, including what a commodity pool is, who must register as a CPO, registration exemptions, registration requirements, compliance requirements and more.

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  • From Vol. 2 No.26 (Jul. 2, 2009)

    IOSCO Report Suggests Mandatory Registration for Hedge Fund Managers and Prime Brokers

    On June 22, 2009, the Technical Committee of the International Organization of Securities Commissions (IOSCO) published a report endorsing mandatory registration for hedge funds and their managers/advisers and for the prime brokers and banks that financially support hedge funds.  The report called for hedge fund regulation based on six core principles.  We describe those principles, and detail what the IOSCO report had to say about them.

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  • From Vol. 2 No.25 (Jun. 24, 2009)

    The Obama Administration Outlines Major Financial Rules Overhaul, Announces Greater Scrutiny for Hedge Funds and Derivatives

    On June 17, 2009, the Obama administration released its proposed “rules of the road” for the nation’s regulation of the financial industry.  The proposal aims to restore confidence in the nation’s financial system after last year’s collapses of The Bear Stearns Cos. and Lehman Brothers Holdings Inc., which caused a credit-market seizure, froze bank lending and paralyzed consumer spending.  The proposal generally tightens regulations on many existing institutions already subject to government scrutiny, and brings many products and companies that had operated outside of the banking system under federal control.  The proposed reforms target almost every facet of the financial system, including hedge funds and derivatives.  We provide a comprehensive summary of the proposals, focusing especially on those sections that are most relevant to hedge funds and hedge fund managers.

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  • From Vol. 2 No.23 (Jun. 10, 2009)

    Representative Michael Capuano Discusses Hedge Fund Regulation with The Hedge Fund Law Report – Expresses More Support for Enhanced Disclosure than for Increased Substantive Regulation

    On January 27, 2009, Representatives Michael E. Capuano (D-Mass.) and Michael Castle (R-Del.) introduced the Hedge Fund Adviser Registration Act of 2009 (HFARA).  The HFARA (H.R. 711) would remove Section 203(b)(3) from the Investment Advisers Act of 1940.  The removal of Section 203(b)(3) would effectively require many currently unregistered hedge fund managers to register with the SEC as investment advisers, thereby subjecting them to the various obligations of registered investment advisers, including annual disclosure requirements, advertising and marketing restrictions and recordkeeping requirements.  In February of this year, The Hedge Fund Law Report talked to Rep. Capuano about his rationale for proposing the HFARA.  At that time, he told us: “No one can look me in the eye and tell me they know how many hedge funds there are or how many assets they manage.”  Last week, we talked in greater depth with Rep. Capuano about the rationale behind his proposal to eliminate the private adviser exemption, and his views on hedge fund regulation generally.  His comments offer deeper insight into the intent of the HFARA, and the scope and focus of any law that may result from the bill or others that seek to regulate hedge funds or their managers.

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  • From Vol. 2 No.20 (May 20, 2009)

    The Hedge Fund Transparency Act and its Unintended Consequences for Cat Bonds

    On January 29, 2009, Senators Carl Levin (D-MI) and Charles Grassley (R-IA) introduced the Hedge Fund Transparency Act (HFTA) for passage in the Senate.  The HFTA is intended to require hedge funds to register with the Securities and Exchange Commission (SEC) and thereby subject them to regulation by that body.  As currently drafted, however, the HFTA proposes amendments to the Investment Company Act of 1940, as amended, which would require any private investment fund with $50 million or more under management to register with the SEC and meet certain disclosure obligations.  Catastrophe or “cat” bond transactions are issued by a special purpose entity which would come within the revised definition of investment companies proposed under the HFTA.  Thus far, introductory remarks on the measure have been made by the sponsors and the HFTA has been read twice and referred to the Committee on Banking, Housing and Urban Affairs.  If enacted, the regulatory obligations of private investment funds with $50 million or more under management, including cat bond issuers, would increase substantially.  In a guest article, Malcolm P. Wattman, a Partner at Cadwalader, Wickersham & Taft LLP, explores the potential consequences of the HFTA for cat bonds.

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  • From Vol. 2 No.19 (May 13, 2009)

    Consensus in Financial Services Committee Hearing on Castle and Capuano Bill (Hedge Fund Adviser Registration Act of 2009) Suggests Support for Comprehensive Overhaul, Increased Transparency and Exemption from Registration for Smaller Advisers

    On May 7, 2009, the Subcommittee on Capital Markets of the House Committee on Financial Services conducted a hearing on the Hedge Fund Adviser Registration Act of 2009 (HFAR), a bill proposed on January 27, 2009 by Reps. Michael Castle (R-Del.) and Michael E. Capuano (D-Mass.).  The HFAR (H.R. 711) would remove Section 203(b) from the Investment Advisers Act of 1940.  The removal of Section 203(b)(3) would effectively require many currently unregistered hedge fund managers to register with the SEC as investment advisers, thereby subjecting them to the various obligations of registered investment advisers, including annual disclosure requirements, advertising and marketing restrictions and recordkeeping requirements.  (Under current law, hedge fund managers generally would have to register with the SEC as investment advisers but for the “private adviser” exemption in Section 203(b)(3), which exempts an adviser from the obligation to register if it: (1) had fewer than 15 clients during the preceding 12 months; (2) does not hold itself out generally to the public as an investment adviser; and (3) does not advise any registered investment companies.)  As Rep. Capuano previously explained to The Hedge Fund Law Report, in discussing his rationale for proposing the change: “No one can look me in the eye and tell me they know how many hedge funds there are or how many assets they manage.”  The consensus among both the members of Congress and the witnesses at the hearing was summed up by the Chairman of the Subcommittee, Paul E. Kanjorski (D-Pa.), who said that he considers it important to “put in place a system to obtain greater transparency for the hedge fund industry” and to make  decisions “about who will monitor them and how.”  We offer details of testimony from representatives of the Government Accountability Office, Managed Funds Association, Alternative Investment Management Association, Coalition of Private Investment Companies and Teacher Retirement System of Texas, relate the details of a lively exchange and offer insights from industry participants on the substance of the testimony.

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  • From Vol. 2 No.18 (May 7, 2009)

    Future Regulation of Private Funds: How the Draft EU Directive & US Legislative Proposals Compare

    The new world order for private funds is beginning to take shape, from a regulatory perspective at least.  We now have legislative proposals to apply additional regulation to private funds – hedge funds and private equity funds – on both sides of the Atlantic: legislation introduced in the U.S. Congress and, last week, a draft EU Directive on Alternative Investment Fund Managers.  Both sets of proposals will potentially add significant additional regulatory obligations and cost.  However, as the proposals stand to date, the changes seem likely to add greater additional burden for those managing private funds from an EU jurisdiction than their U.S. competitors.  Some of the proposed changes on both sides of the Atlantic are welcome – but some, particularly in the EU proposals, are of doubtful benefit and have the potential to add significant additional cost for the industry.  In a guest article, Richard Horowitz, a Partner at Clifford Chance US LLP, compares the likely shape of future regulation of private funds in the U.S. and the EU.

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  • From Vol. 2 No.17 (Apr. 30, 2009)

    The Hedge Fund Industry in Transition

    With the completion of the G20 summit and the continued coverage of economic woes by the media, it leaves the reader to ponder how we arrived at this point in our history.  In a comprehensive guest article, Ernest Edward Badway and Lauren Lezak, Partner and Associate, respectively, at Fox Rothschild LLP, explore the foundation for and the potential changes in store for the hedge fund industry.

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  • From Vol. 2 No.17 (Apr. 30, 2009)

    Will the States Reassert Control over the Regulation of Private Offerings?

    Since passage of the Securities Act of 1933 and the Securities Exchange Act of 1934, regulation of public offerings of securities has largely been the province of federal, as opposed to state, regulators.  Just over 60 years after passage of those laws, Congress confirmed in the National Securities Markets Improvement Act of 1996 (NSMIA) that regulation of private offerings of securities would also fall primarily within the federal jurisdiction.  Specifically, NSMIA provides that the federal regulation of certain private offerings preempts state regulation, although states retain the authority to enforce anti-fraud rules in connection with such offerings.  That is, the federal government has ex ante regulatory authority, and the states have ex post anti-fraud enforcement authority.  To a growing chorus of state securities regulators, that ex post enforcement authority is not sufficient to police and prevent fraud and other wrongdoing in connection with private offerings.  While a reversal of the preemption effected by NSMIA does not appear to be imminent, the agitation by state securities regulators is cause for concern among hedge fund managers that offer interests privately.  This article examines the structure of Regulation D (Reg D), the safe harbor under the Securities Act of 1933 (Securities Act) under which many hedge funds offer interests; the limited anti-fraud enforcement authority retained by the states in connection with Reg D offerings, and the absence of any precedent for the invocation of that authority; recommendations for changes to private offering regulation recently espoused in an audit of the Reg D process conducted by the SEC’s Office of the Inspector General (OIG); and the possibility of greater state involvement in regulation of Reg D offerings.

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  • From Vol. 2 No.16 (Apr. 23, 2009)

    Key Players in Washington Agree that Increased Hedge Fund Regulation is Necessary, but Differ on the Shape that Regulation Should Take

    A rift has developed between the chairmen of the main House and Senate committees dealing with hedge funds and their managers, according to conversations between The Hedge Fund Law Report and key congressional staff, reviews of numerous public statements by key figures and testimony before relevant committees in recent weeks.  While those committee chairmen – Senator Christopher Dodd of Connecticut, Chairman of the Senate Banking Committee, and Representative Barney Frank of Massachusetts, Chairman of the House Committee on Financial Services – broadly agree that some form of increased regulation of hedge funds and hedge fund managers would be an appropriate political (if not economic) response to recent economic events, they differ on the direction that increased regulation should take.  Judging by the flurry of recent bills, comments and other proposals on and around Capitol Hill, the drive to change or “reform” hedge regulation is well underway.  More than a dozen Senate and House hearings directly or indirectly focusing on hedge funds have been held so far, a slew of them coming in late March and early April.  We describe the current state of play on the Hill, including the Dodd-Frank face-off, recent testimony from Treasury Secretary Timothy Geithner, the status of the bill proposed in January by Senators Grassley and Levin to require registration of hedge funds, the views of Mary Shapiro of the SEC and Richard Baker of MFA and comments from Capitol Hill observers.

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  • From Vol. 2 No.15 (Apr. 16, 2009)

    Hedge Fund Managers Launching Mutual Funds in an Effort to Stay a Step Ahead of Regulatory Convergence

    Although the term “hedge fund” has no statutory or common law definition, historically hedge funds have been defined in large part by what they are not: mutual funds.  Unlike mutual funds, hedge funds have been exempt from the definition of “investment company” under the Investment Company Act of 1940, and unlike mutual fund advisers, hedge fund advisers have not been required to register under the Investment Advisers Act of 1940.  Free from many regulatory restrictions that bind registered funds and advisers, the hedge fund format has been understood as a blank canvas on which a creative manager can realize his or her full investment potential; and the historical returns of some managers have borne out that understanding.  However, in a potent sign of the extent to which the challenging economic climate has changed the hedge fund industry, hedge funds managers are now engaging in a move formerly considered unthinkable – they are launching mutual funds.  While there are various reasons for this trend, two macro variables are largely responsible.  First, the negative feedback loop of poor performance and redemptions that has virtually halved the capital base of the industry.  Without capital there are no hedge funds – or mutual funds – and so hedge fund managers are looking for new sources of capital to fill the holes left by redemptions, even if that new capital generates lower fees.  Second, the increasing likelihood, perhaps inevitability, of regulatory convergence between hedge funds and mutual funds, and their respective managers.  Bills presently before Congress would subject hedge funds and their managers to many of the regulations currently applicable to mutual funds and their managers.  If such bills pass – and the consensus view is that they will, though likely with modifications from their current forms – then the regulatory playing field will be leveled and the legal advantages of running a hedge fund over a mutual fund will largely disappear.  In this sense, launching a mutual fund constitutes a recognition by a hedge fund manager of what may well be a legal fait accompli, and an effort to capitalize (from a marketing perspective) on the “aura” of being a hedge fund manager while that still means something in the retail imagination.  We discuss the convergence trend, the benefits and burdens to hedge fund managers of running a mutual fund, which hedge fund strategies lend themselves to mutual fund structures, allocation and marketing considerations and competition issues.

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  • From Vol. 2 No.14 (Apr. 9, 2009)

    Hedge Fund Managers Grapple with Legal and Practical Consequences of Demands from CalPERS, URS and Other Pension Funds for Better Investment Terms and Separate Accounts

    While better investment terms cannot completely offset poor hedge fund performance, poor or middling performance can increase the receptivity of managers to restructuring of their relationships with investors – especially large institutional investors.  Accordingly, while the credit crisis has engendered a rash of redemptions, it has also occasioned a series of restructurings of the terms under which significant institutions remain invested in hedge funds or make new investments.  However, while the terms of such restructurings have received significant and deserved attention, topics that have received less attention – but that may be as or more important than the terms themselves – include the mechanics by which the terms are implemented, and the legal considerations that may arise in connection with such implementation.  We explore these operational and legal considerations in detail, including: the relevant language in fund documents; investor consent requirements; liquidity issues; most favored nation provisions; redemption, registration and allocation issues; and cost considerations.

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  • From Vol. 2 No.13 (Apr. 2, 2009)

    Treasury Calls for Registration of Hedge Fund Managers with Assets Under Management Above a Certain Threshold and Outlines Framework for Other Regulatory Reforms Aimed at Limiting Systemic Risk

    On March 26, 2009, the U.S. Department of the Treasury outlined a new framework for regulatory reform, including a proposal to require advisers to hedge funds (and other private pools of capital) with assets under management above a certain threshold to register with the SEC, along with certain other regulatory reforms.  As Secretary Geithner observed in written testimony before the House Financial Services Committee that day, addressing “critical gaps and weaknesses” exposed in our financial regulatory system over the past 18 months “will require comprehensive reform – not modest repairs at the margin, but new rules of the road.”  The Treasury framework for regulatory reform includes four broad components: (1) addressing systemic risk; (2) protecting investors and consumers; (3) eliminating gaps in the regulatory structure; and (4) fostering international coordination.  To address the first category – systemic risk – the Treasury proposes, among other things: (1) registration of all hedge fund advisers with assets under management above a certain threshold; (2) formation of a comprehensive oversight framework for the Over-The-Counter (OTC) derivatives market; (3) creation of a single independent regulator responsible for “systemically important firms” and critical payment and settlement systems; and (4) imposition of higher standards on capital and risk management for “systemically important firms.”  We provide a detailed summary of the proposed framework.

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  • From Vol. 2 No.11 (Mar. 18, 2009)

    “Hedge Funds – The Regulatory Wagons are Circling,” a Webinar Hosted by SEI Knowledge Partnership

    On February 12, 2009, SEI Knowledge Partnership hosted a webinar titled “Hedge Funds – The Regulatory Wagons are Circling,” in which panelists discussed recent proposed legislation relating to hedge funds and their managers, and the potential impact of those proposals on the hedge fund industry.  We detail the relevant insights from that conference, and in the process review various of the bills currently pending in Congress to regulate hedge funds and their managers.

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  • From Vol. 2 No.7 (Feb. 19, 2009)

    Representatives Castle and Capuano Propose Bill on Hedge Fund Adviser Registration, and Representative Castle Proposes Bills on Pension Investments in Hedge Funds and Study of the Hedge Fund Industry

    On January 27, 2009, Representatives Michael Castle (R-Delaware) and Michael E. Capuano (D-Massachusetts) introduced the Hedge Fund Adviser Registration Act of 2009 (HFAR).  The same day, Rep. Castle also introduced the Pension Security Act of 2009 (PSA) as well as of the Hedge Fund Study Act (HFS).  Generally, the HFAR would eliminate the exemption on which many hedge and other private fund managers rely to avoid registration as investment advisers; the PSA would require disclosure by pension funds of their investments in hedge funds; and the HFS would require the President’s Working Group on Financial Markets to conduct a study of the hedge fund industry.  We offer a detailed explanation of each bill, and include insight from an interview we conducted with Rep. Capuano.

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  • From Vol. 2 No.7 (Feb. 19, 2009)

    “Oversight of Private Pools of Capital” Is Firmly on the Reform Agenda – What It Might Mean for U.S. Fund Managers

    At Mary Schapiro’s January confirmation hearing for her nomination as Chair of the Securities and Exchange Commission, she called for registration of hedge funds.  Members of the Senate Banking Committee promptly pledged to help with legislation, and bills to that effect were put forward before the month was out.  At about the same time, the “Group of 30” – an international committee of current and former senior regulators and bankers – released 18 recommendations for reform of financial market oversight.  Recommendation #4 is titled “Oversight of Private Pools of Capital” and calls for registration and regulation of managers of leveraged investment pools.  With that background it should be clear that the consensus in Washington, DC is that regulation of hedge funds – and likely private equity funds as well – should be part of the overhaul of US financial markets.  In a guest article, Shearman & Sterling partner Nathan Greene fleshes out what that consensus might mean by outlining potential new obligations for fund managers.

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  • From Vol. 2 No.5 (Feb. 4, 2009)

    Levin and Grassley Introduce Bill that would Require Hedge and Other Private Funds to Register to Avoid Regulation as Investment Companies

    On January 29, 2009, Senators Carl Levin (D-Michigan) and Charles Grassley (R-Iowa) introduced a bill that would, if enacted, require certain hedge and other private funds to register with the SEC, file an annual disclosure document, maintain books and records in accordance with SEC rules and co-operate with SEC information or examination requests.  The Hedge Fund Transparency Act (HFTA), as the bill is titled, would apply to funds currently excluded from the definition of “investment company” under Sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940, and that have at least $50 million in assets under management.  That is, it would apply to many hedge funds, and also to many private equity, venture capital and other private funds (and thus the words “hedge fund” in the title of the act suggest that the bill is more limited than it in fact is).  In exchange for registering and performing the other required actions, covered funds would remain exempt from regulation as investment companies.  In addition, the HFTA would require hedge funds to establish anti-money laundering programs and report suspicious transactions.  We provide a comprehensive overview of the mechanics of the bill, discuss whether it includes or presages a hedge fund adviser registration requirement and report on responses to the bill from hedge fund industry participants and Washington insiders.

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  • From Vol. 2 No.3 (Jan. 21, 2009)

    How Hedge Fund Managers Can Prepare for the Virtual Inevitability of Registration

    Despite the fact that the origins of the present economic crisis can be traced largely to subprime mortgage lending and repackaging, that the most severe blow ups with the most wide-ranging ramifications occurred at the most highly regulated institutions, that Bernard Madoff did not manage hedge funds, as such – despite all this, increased hedge fund regulation during the coming year has come to be understood in the industry as a virtual inevitability.  Among the chief anticipated components of any forthcoming regulatory package is likely to be a delegation from Congress to the SEC to require registration of hedge fund advisers.  And most hedge fund law watchers expect any registration rule proposed by the SEC to be crafted with the 2006 Goldstein decision firmly in mind, so that the rule hews closely enough to any mandate from Congress to be entitled to Chevron deference.  (By the same token, any delegation from Congress on this point is likely to be broad enough to accommodate even relatively expansive rulemaking by the SEC.)  In a rule finalized in December 2004, the SEC required certain hedge fund advisers to register with the agency, and in June 2006, the D.C. Circuit Court of Appeals vacated the rule.  After some background on the 2004 rule and registration in general, we offer practical insight on what hedge fund managers can do to prepare for a registration requirement.

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  • From Vol. 2 No.2 (Jan. 15, 2009)

    The Shape of Hedge Fund Regulation to Come: Whistleblower Programs, Capital Requirements and Restructured Regulators

    On the heels of the worst year of hedge fund performance in recent memory, capped by lurid and still unfolding scandals, hedge fund managers are bracing for the near inevitability of new regulations for the industry. We discuss in detail two potential categories of new regulations – strengthened whistleblower programs for hedge funds and capital requirements for hedge funds similar to those applicable to mutual funds. Specifically, we address the mechanics of such potential regulations, the precedents and some of the practical obstacles to implementing such regulations. Also, we explore other potential new regulations, and the contemplated restructuring (and consolidation) of financial market regulators.

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  • From Vol. 1 No.29 (Dec. 24, 2008)

    The Hedge Fund Law Report Launches Interactive Regulatory & Legislative Chart

    The response to the international financial crisis has included an unprecedented volume and complexity of new law and regulation – a trend likely to continue and even increase in the U.S. when the next Congress convenes and the new administration takes office.  Much of that new authority will affect hedge funds and their managers, directly or indirectly.  To help our subscribers navigate the shifting regulatory landscape as efficiently as possible, we at The Hedge Fund Law Report are proud to announce the launch of our new Regulatory & Legislative Chart.

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  • From Vol. 1 No.18 (Aug. 11, 2008)

    Proposed German Law Would Impose Regulatory Burden on Closed-End Funds

    In a move that has surprised and even angered some market players, the German Ministry of Finance put forward a proposal to amend the country’s banking act that, in essence, will require closed-end funds to apply for a license to deal in the securities and derivatives market. If approved, the new legislation would effectively put under supervisory authority a series of investment vehicles that until now have operated without a license, including certain hedge funds, private equity funds and other entities that raise capital among German investors and do business in that country.

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  • From Vol. 1 No.17 (Aug. 1, 2008)

    SEC Provides Guidance Regarding Exemptions From Registration for Managers of “Family Offices”

    In two recent pronouncements, the SEC provided much-needed guidance on when a family office does not have to register as an investment adviser. In a recently-issued no-action letter, the SEC stated that it would not recommend enforcement action against a 3(c)(7) fund in which a fund managed by a family office invested, based on an investment in the family office fund by the non-family member executive director of the family office. In a roughly contemporaneous order granted to another family office, the SEC held that a family office did not have to register as an investment adviser where that family office provided services exclusively to a single family, was owned by the family and had a board of directors, the majority of which was comprised of family members.

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  • From Vol. 1 No.14 (Jun. 19, 2008)

    Working Paper Analyzes India’s Approach to Hedge Fund Regulation

    A recent working paper analyzes various strategies that have been adopted by the Securities and Exchange Board of India in regulating the hedge fund industry, and examines in detail their advantages and disadvantages.

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  • From Vol. 1 No.10 (May 6, 2008)

    To Regulate, or Not to Regulate

    • At Future of Financial Regulation Conference on May 1 in New York, leading industry participants discussed status of hedge fund regulation.
    • One of key take-aways is that investors are less concerned with whether or not a hedge fund adviser is registered, and more concerned with a firm's "tone at the top" and its compliance with best industry practices (for example, the practices embodied in the recent PWG private sector committee reports).
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